Ukrainian ESBU Faces Legal Pushback Over Aircraft Leasing Taxed as Royalties

The Ukrainian Bureau of Economic Security (ESBU) has opened a series of criminal investigations targeting airlines accused of non-payment of royalties on aircraft leasing agreements with non-resident lessors. This enforcement action persists despite established judicial precedent in Ukraine that prohibits treating vehicle leasing as royalty payments.

According to Rostyslav Kravets, partner at the law firm "Kravets & Partners," law enforcement officers are legally required to consider judicial practice in their investigations. Yet, ESBU investigators have pursued nearly all Ukrainian airlines leasing aircraft from foreign companies, asserting that lease payments constitute royalties—fees charged for the use of intellectual property rights.

This interpretation disregards the fundamental legal nature of aircraft as vehicles rather than intellectual property. Moreover, Ukraine maintains double taxation avoidance treaties with several countries, under which taxes on leasing payments are paid in the lessor’s country of residence. At least five airlines—UIA, Constanta Airline, Urga, N3OPERATIONS, and Skyline—have already faced pressure from ESBU. Similar approaches are reportedly being applied in other sectors, including railway transport and agricultural machinery leasing.

For over three decades, Ukrainian tax law has consistently treated leasing as a property use transaction, not as a royalty-bearing intellectual property license. This longstanding understanding was unchallenged by tax authorities or law enforcement until May 24, 2024, when the State Tax Service issued clarifications asserting that aircraft leases from non-resident companies should be taxed as royalties. This shift has been criticized as a misinterpretation of both Ukrainian and international tax law.

Mykola Shcherbyna, executive director of the Ukrainian Air Transport Association, described the ESBU’s approach as a "tax on the Ukrainian flag," warning it undermines the global competitiveness of Ukrainian air carriers.

Judicial decisions have repeatedly affirmed that vehicles do not qualify as intellectual property objects. A notable ruling by the Sixth Administrative Court of Appeal on April 16, 2025, explicitly stated that "the concept of 'royalties' involves payments for the use or the right to use objects of intellectual property," and that vehicles—including complex machinery—do not meet this criterion.

The court further rejected attempts by tax authorities to classify railway wagon leasing as royalty payments, emphasizing that wagons are not intellectual property and thus cannot generate royalties.

Aircraft, legally defined as vehicles, are not patents, copyrighted works, trademarks, software, or know-how. They serve transport functions analogous to railway wagons, locomotives, or agricultural machinery, which perform production functions.

Consequently, efforts to reclassify aviation leasing as intellectual property use contradict international norms, Ukrainian tax legislation, and established court rulings.

This judicial stance is supported by multiple decisions across different years and courts. In 2025, the Eighth Administrative Court of Appeal ruled that leasing agricultural machinery cannot be treated as royalties, noting that mass-produced machinery is not intellectual property.

Earlier, in 2022, the Fifth Administrative Court of Appeal dismissed attempts to reclassify railway platform rentals as royalty payments, reaffirming that leasing constitutes an economic use of property rather than a transfer of intellectual property rights.

Similarly, in a dispute involving "Rail Logistics" LLC and the State Tax Service’s Central Interregional Department, the court sided with the business against additional tax assessments on operational leasing of railway wagons from Estonian lessors, underscoring that transport is not intellectual property.

Even the Higher Administrative Court of Ukraine has previously upheld this interpretation, reinforcing a consistent judicial approach that leasing vehicles cannot be taxed as royalties.

The ongoing ESBU investigations thus stand in contrast to a well-established legal framework and raise significant concerns about the proper application of tax law and the economic impact on Ukrainian transport sectors.