The State Tax Service interprets aircraft lease payments as royalties, even though it concerns the use of vehicles, not the transfer of intellectual property rights. Because of this, Ukrainian airlines are already facing criminal proceedings and the risk of retrospective additional charges.
The State Tax Service’s interpretation of aircraft leasing as royalties requires official clarification from the Ministry of Finance. Without a unified approach to applying international conventions, the tax dispute surrounding the aviation sector will only deepen. This was stated by Tetiana Shevtsova, a member of the Public Council under the Ministry of Finance, a certified auditor, and a tax consultant, during a round table discussion titled “New Tax Practice Regarding Aircraft Leasing,” as reported by UNN.
The issue arose after the STS began interpreting lease payments for the use of aircraft as royalties in 2024. This became the basis for the Bureau of Economic Security initiating criminal proceedings against Ukrainian airlines. The investigation considers that airlines allegedly improperly applied the provisions of international double taxation avoidance conventions and failed to withhold tax when paying income to non-residents.
According to Shevtsova, this position of the tax authorities is based on an overly broad interpretation of the term “royalties.” She emphasized that the comments to the OECD Model Tax Convention, to which the STS refers, define the rental of equipment as royalties only in a narrow context – when it involves the transfer of intellectual property rights.
“Why do you not pay attention in this case to the fact that the model convention also interprets such payments as royalties only in the case of equipment rental associated with the transfer of technical drawings or the production process? These are precisely the cases mentioned in the comments to the model convention,” Shevtsova pointed out.
Consequently, such an approach cannot be applied to aircraft.
“The terminology of ‘equipment’ and ‘vehicles’ is clearly distinguished according to all accounting legislation and international standards. Airplanes, containers, wagons are not equipment; they are vehicles. Therefore, this story is so far-fetched and needs to be resolved correctly,” stressed the member of the Public Council under the Ministry of Finance.
That is why the issue requires official regulation at the level of the Ministry of Finance. A generalized tax consultation would allow for the formation of a unified approach to the application of the Tax Code and international double taxation avoidance conventions, eliminating legal uncertainty for both businesses and regulatory bodies.
However, time for such a decision is running out. As previously reported by UNN, Ukrainian airlines are already being asked to pay a 15% tax on lease payments, not only for the future but also retrospectively – for operations carried out over the past seven years. At the same time, the average profitability of air carriers is about 7-10%, so such an additional tax burden could be critical for the industry.
Moreover, neither the Tax Code of Ukraine nor the international conventions on which these payments were based have changed during this time. In fact, the new interpretation is being applied to legal relations that have not raised claims from the state for decades.
Recall
The Bureau of Economic Security is investigating criminal proceedings against at least five Ukrainian air carriers: МАУ, “Avia Company Constanta,” “Urga,” “N3OPERESHINS,” and “Skyline Express.” In the materials of these proceedings, the BES questions the application of international double taxation avoidance conventions by airlines, and the amounts of allegedly unpaid taxes in individual cases reach tens of millions of hryvnias.
The criminal prosecution is taking place under extremely challenging conditions for the industry. After all, since the closure of airspace, Ukrainian civil aviation has been operating outside the country for over four years. To preserve their businesses, airlines have been forced to relocate their fleets and personnel abroad, reorient their operations to international markets, awaiting the resumption of flights in Ukraine.