Ukrainian Legal Experts Challenge Tax Authority’s Classification of Transport Leasing Payments as Royalties

Legal experts in Ukraine have voiced strong opposition to recent efforts by the Bureau of Economic Security (BES) and tax authorities to treat payments for the leasing of vehicles—including aircraft, railway rolling stock, and agricultural machinery—as royalties. According to Alina Parkhuta, an intellectual property lawyer at the Lawgic law firm, such transactions do not involve the transfer of intellectual property rights and therefore cannot be taxed as royalties under Ukrainian law.

The BES has initiated a series of criminal cases targeting at least five airlines, including UIA, Constanta Airline, Urga, H3OPERATIONS, and Skyline, over leasing transactions with non-resident lessors. These actions come despite the existence of international conventions designed to prevent double taxation, including provisions specifically addressing leasing operations. The legal community warns that these cases threaten not only the affected airlines but also the broader stability of Ukraine’s civil aviation industry.

Analysis of court documents from the Unified Register of Court Decisions indicates that the BES’s approach is inconsistent with established legal principles and could expose airlines to the risk of illegal double taxation. Judicial practice consistently affirms that royalties are applicable only in cases involving the use of intellectual or industrial property, such as when an aircraft is used as a scientific laboratory. This concept does not extend to the use of civil air transport for passenger or cargo services.

Lawyers highlight a fundamental legal distinction between tangible objects and the results of intellectual activity. Parkhuta explains that intellectual property refers to rights over intangible outcomes of creative or scientific-technical work, not the physical objects themselves. While transport vehicles may embody the results of such activity, this does not automatically confer intellectual property status on the vehicles as a whole.

In the transport sector, only specific components—such as innovative engines, safety systems, software, industrial designs, or trademarks—can be considered objects of intellectual property. The vehicle itself, particularly if mass-produced, does not qualify unless it incorporates a protected technical or design innovation.

For an object to be recognized as intellectual property, it must contain a novel technical solution or innovation that is legally protected. As a general rule, standard transport vehicles do not meet this criterion, and leasing agreements for such vehicles do not involve the transfer of intellectual property rights.

Ukrainian legislation and international practice define royalties as payments for the use of intellectual property objects or for the granting of rights to such use. This includes patents, copyrights, know-how, and trademarks. Royalties are not applicable to the mere use of physical property unless the agreement explicitly provides for the transfer of intellectual property rights.

Leasing, by contrast, is a form of property use that does not entail the transfer of intellectual property rights unless specifically stated in the contract. The mere existence of a lease agreement for a vehicle does not justify classifying payments as royalties, especially when the vehicle lacks the characteristics of an intellectual property object.

The key criterion for tax qualification is the subject of the rights being transferred, not the form of the contract. If the transaction involves only the use of a physical object—such as an airplane, locomotive, or agricultural machine—without the transfer of rights to patents, software, or other intellectual property, there is no legal basis for treating the payments as royalties.

This principle is particularly evident when the leased vehicle is not a unique or innovative object and the leasing agreement does not connect the right of use with the transfer of intellectual property rights.

Attempts by the BES and tax authorities to categorize lease payments as royalties disregard fundamental provisions of intellectual property and tax law. Such an approach risks distorting the tax base and could result in unlawful additional tax assessments, particularly in the context of international leasing arrangements.

It is also noteworthy that for more than three decades, Ukrainian legislation governing the taxation of leasing operations—specifically within the Tax Code—has remained unchanged, and until 2024, the system operated without significant objections from tax or law enforcement bodies.