The airplane as “intellectual property”: how BEB’s new move hinders the development of Ukrainian aviation

The Bureau of Economic Security (BES) has put Ukrainian airlines under serious pressure as they attempt to reclassify aircraft lease payments as “royalties.” As part of these actions, numerous criminal cases have been opened against airlines operating internationally, which calls into question the applicability of international double taxation conventions.

Airlines such as UIA, Constanta Airlines, Urga, N3OPERATIONS, and Skyline have faced claims of alleged tax evasion in the case of aircraft leasing. The issue is based on a new BES interpretation that treats lease payments as income sourced in Ukraine, contrary to elements of international tax law.

According to a new interpretation published by the State Tax Service of Ukraine headed by Tetyana Kiriyenko, leasing agreements are now considered royalty payments subject to taxation. This innovation significantly complicates the financial situation of airlines, as many of them lease aircraft from international companies under the terms agreed upon under old contracts.

With the outbreak of the war over the territory of Ukraine, civil air carriers had to transfer all their operations abroad. Thus, all the companies’ income is generated outside Ukraine, which is accordingly subject to the law of the country where the leasing takes place. According to international conventions, companies pay taxes in the country of residence of the lessor.

The situation is complicated by the fact that airlines have not previously encountered tax remarks during inspections, which highlights the changes in approaches to law enforcement.

Experts fear that the new rules of additional taxation may lead to an increase in the cost of air tickets, negatively affect the financial results of companies and, ultimately, reduce the interest of foreign lessors in cooperation with Ukrainian air carriers.

Meanwhile, criminal investigations are underway in Ukraine against several airlines, including UIA and Constanta Airlines, for alleged improper application of international tax treaties. The service believes that these companies were obliged to pay taxes on non-resident income, although, according to selected experts, this should not be the case due to the lack of sources of income on the territory of Ukraine.

Conducting criminal cases without confirming tax offenses raises doubts about the legality of the actions of investigators and may provoke negative consequences for the entire aviation industry in Ukraine. As a result, violations of tax and economic treaties may reduce the competitiveness of Ukrainian air carriers in international markets, causing serious damage to both the industry and the image of the state.