Ukrainian Aviation Under Pressure: BEB's New Interpretation of Leasing Contradicts Global Practice
Kyiv • UNN
The Bureau of Economic Security (BEB) has opened cases against airlines, interpreting aircraft leasing as royalties. This violates international agreements and threatens the destruction of Ukrainian aviation.
Global civil aviation is built on leasing. The vast majority of airlines operating in the international market do not own aircraft directly, but use them under operating or financial leasing terms through foreign leasing companies. It is this model that allows air carriers to promptly update their fleet, reduce costs, and maintain competitiveness. Ukrainian air carriers are no exception; they also use this model, but face obstacles from state authorities, UNN reports.
The Bureau of Economic Security (BES) is attempting to interpret the leasing payments of Ukrainian air carriers for aircraft as royalties and has already opened a number of criminal proceedings. Lawyers and international taxation experts emphasize that such a practice contradicts not only the economic nature of leasing but also international conventions on the avoidance of double taxation, to which Ukraine is a party. Moreover, such an approach by tax and law enforcement agencies, particularly the BES, destroys the competitiveness of domestic air carriers and makes them unattractive to foreign lessors.
Aviation does not exist without leasing
Today, leasing is the basic model for the functioning of the global aviation market. According to data from international analysts, about half of the world's aircraft fleet is operated specifically through leasing mechanisms.
The world's largest airlines — from Ryanair and Lufthansa to Turkish Airlines and Wizz Air — use aircraft obtained through leasing. This is a standard international practice that allows companies to avoid spending billions of dollars on one-time aircraft purchases while effectively expanding their air fleet.
Lessors are usually specialized foreign companies registered in jurisdictions with developed financial and tax legislation — Ireland, the United Kingdom, the USA, Singapore, the UAE, or Cyprus.
The mechanism itself looks simple: a leasing company buys an aircraft from a manufacturer, such as Boeing or Airbus, and transfers it to an airline for use for a period specified by the contract in exchange for regular payments.
In this case, the airline pays specifically for the use of a tangible asset, which is the aircraft, and not for the use of an object of intellectual property.
Why aircraft leasing is not a royalty
The key difference between leasing and royalties lies in the subject of the payment. Royalties are payments for the use of an object of intellectual property (patent, trademark, copyright, technology, software, or know-how). In contrast, leasing is the use of property, which in this case is air transport.
"Transport leasing is not a royalty. It is the ordinary use of property. If a company leases an airplane, helicopter, car, wagon, or other equipment, it pays not for 'intellectual property,' but for the opportunity to use a specific vehicle. That is, the company does not buy the right to a patent, trademark, secret technology, drawing, program code, or know-how. It simply receives the transport for use for a certain period and pays leasing payments for it," explained lawyer Dmytro Kasianenko in a comment to UNN.
An airline that leases an aircraft does not receive rights to Boeing or Airbus technologies, does not acquire the right to use the manufacturer's patents, and does not receive any intellectual property rights. In other words, it is a matter of property rental in an international commercial form.
That is why, in international practice, payments for aircraft leasing are traditionally considered income from the operation or rental of property, rather than royalties.
How double taxation avoidance conventions work
Like other states, Ukraine has dozens of international conventions on the avoidance of double taxation with various countries around the world. Among them are Ireland, the United Kingdom, Cyprus, the UAE, and other jurisdictions where leasing companies are residents.
The main goal of such agreements is to avoid a situation where the same income is taxed twice in two different countries.
International Conventions specify which country has the right to tax the income, what rates may be applied, how tax residency is confirmed, and in which cases taxation is not applied at all.
In most international agreements, income from the operation or rental of vehicles used in international transport is taxed in the country of residency of the company receiving the income, i.e., in the country where the lessor is registered.
This means that if the lessor is a resident of, for example, Ireland, and pays taxes there, Ukraine cannot automatically tax the same income a second time with another tax simply because of a different interpretation of the transaction.
However, in practice, the opposite is happening. Despite the fact that legislation in the field of leasing taxation in Ukraine has not changed for over 30 years, starting from 2024, the Bureau of Economic Security decided to change its approach.
Investigators have opened a number of criminal proceedings involving almost all Ukrainian companies that lease aircraft abroad from non-resident companies of Ukraine. The BES is convinced that airlines should have paid royalties in Ukraine, i.e., a fee charged for the use of intellectual property. At the same time, the fact that transport is not intellectual property is completely ignored, as is the fact that Conventions on the avoidance of double taxation are in force between Ukraine and a number of countries. At least 5 airlines have already suffered from BES pressure: UIA, Constanta Airline, Urga, H3OPERATIONS, and Skyline. Furthermore, court materials indicate similar approaches in other industries, with attempts to impose an additional levy on leased railway transport and even agricultural machinery.
Following such a change in the interpretation of legislation, according to Mykola Shcherbyna, an expert in transport and machine building and executive director of the Public Union "Ukrainian Air Transport Association," Ukrainian airlines are forced to effectively pay a "flag surcharge," meaning they pay for being Ukrainian.
"Accordingly, this (change in interpretation – ed.) creates a situation where a Ukrainian airline becomes less attractive a priori. And this is not a question of management efficiency; it is a question of the rules of the game, which in this case are dictated by the state itself in the person of tax and regulatory authorities. I would say that our airlines are effectively forced to pay a surcharge for operating under the flag of Ukraine," he noted in an interview with UNN.
International law takes precedence
Ukrainian legislation explicitly provides for the priority of international treaties over domestic legislative norms in taxation matters. That is, if an international convention establishes rules other than national legislation, the provisions of the international treaty are applied.
This is a basic principle of international tax law used in all countries integrated into the global economy.
In addition, Ukraine is a participant in international tax initiatives, including the Multilateral Instrument (MLI), which was developed within the framework of the OECD BEPS plan to unify approaches to international taxation.
At the same time, it should be emphasized that neither the MLI nor the OECD model conventions change the nature of leasing or turn it into a royalty.
What will happen if leasing begins to be widely recognized as royalties
The global aviation leasing market is built on predictability and unity of approaches. If a country begins to interpret classic international operations in an unconventional way, it automatically increases legal risks for business. In this context, the actions of the Bureau of Economic Security could lead to serious economic and reputational consequences for Ukraine.
Firstly, this would mean actual double taxation of international operations and a refusal to comply with the norms of international law. This would call into question the fulfillment of all international conventions ratified by the Verkhovna Rada. Thus, Ukraine's reputation as a reliable partner could suffer.
Secondly, this could make Ukrainian air carriers unattractive to foreign lessors, as the cost of leasing will increase and financing conditions will deteriorate.
In the conditions of the sky being closed due to the war, Ukrainian airlines were forced to relocate all their activities abroad — from flights to the maintenance of aircraft and helicopters. Therefore, the loss of competitiveness in the international market will jeopardize their survival and the preservation of the possibility of returning to Ukraine in the post-war period. This, in turn, will significantly limit the possibilities for Ukraine's economic recovery and ultimately make Ukrainians dependent on foreign air carriers.
It should not be forgotten that Ukrainian air carriers also perform humanitarian missions for the UN, where they are trying to displace Russia. Withdrawing from this market would mean losing to the aggressor country. Therefore, a legitimate rhetorical question arises: whose side is the Bureau of Economic Security playing on and whose interests is it defending?