Tax-free liquidation of a CFC

Nuances of tax legislation in Ukraine for CFCs
Law, CFC, Liquidation, Taxes


Ukraine’s tax reform, focused on the implementation of the BEPS plan, is gaining momentum. The Verkhovna Rada is constantly generating new bills aimed at increasing tax transparency and the culture of citizens. Earlier in our blog, we talked about CFC rules (controlled foreign companies rules), and today we will consider a legal method to get rid of unnecessary tax burdens. 


What is tax-free liquidation of a CFC?


Tax-free liquidation, first proposed by Law No. 466, has become such an instrument. The basic idea is that owners of CFCs, before the application of the CFC rules, can liquidate their companies and tax their income at preferential rates. As of today, this issue is regulated by three legislative acts. The last of them was adopted on 17.12.2020 (Law of Ukraine No. 1117), so we propose considering the current situation.


Initially, to take advantage of tax-free liquidation, the following requirements must be met:


  1. The registration of the controlled foreign company must be carried out no later than May 23, 2020.
  2. The period of liquidation is limited and is calculated from 01.01.2020 to 31.12.2021. However, there are some exceptions to the rule, when it is possible to do it after 31.12.2021 with preservation of the right to benefits:
  • if there are restrictions or requirements in the CFC’s country of incorporation;
  • if the CFC is a party to the court proceedings;
  • if the law of the state of incorporation of the CFC contains an explicit reservation on the minimum holding period for shares of that CFC, failure to comply with which will expose the holder to foreign tax liabilities (the holding period should begin before 01.01.2020 and end after 31.12.2021).


In general, these are circumstances that make it impossible to take advantage of tax-free liquidation in time, even if the CFC owner wishes. However, if these obstacles disappear, the liquidation must be carried out within the next 365 days.


  • Submit the necessary documents to the regulatory authorities, including a tax return, an application in any form describing the characteristics of the CFC and the liquidation assets, as well as documents containing the estimated value of the assets received from the liquidation of the CFC.

Preferential terms

Let’s take a closer look at the proposed preferential tax rates. The main point here is an exemption from personal income tax in the amount of 18%, which the legislator clearly and unequivocally prescribed. In particular, Law №1117 regulates that income in cash or any other form of property from the liquidation of a foreign company received by a taxpayer individual (shareholder, ultimate beneficial owner) are not included in the total taxable income of the taxpayer for the years 2020-2021. They are reported on the Declaration of Estate but are not subject to taxation. The issue of payment of the military fee of 1.5% remained controversial. The Ministry of Finance gave the answer to it in its general tax advice of 14.05.2021, which states, in particular, that upon receipt of liquidation assets, if all the requirements are met (mentioned above), the owner should transfer only 1.5% to the budget. 


In the same consultation, the Ministry of Finance specified the list of property that will be included in the liquidation assets, namely: domestic/foreign currency, movable/immovable property, corporate rights, bank metals, etc. In this case, you do not have an obligation to physically move any property to the territory of Ukraine in order to take advantage of the tax benefits.

Nominal owner — other liquidation

There is a somewhat different procedure for liquidating a CFC if its owner is a nominal (de jure owner, but the final impact has a “controller” — a resident of Ukraine). Even in this not entirely legal option, the legislator is allowed to take advantage of the benefits. In addition to the standard requirements, the real owner must submit a document to the supervisory authority to confirm the transfer of all liquidation assets from the nominal. For example, this could be a nominal maintenance agreement, a trust agreement, or any other agreement regulating the conclusion of such legal relations. If liquidation assets have been directly transferred to the real owner, bypassing the nominal owner, such documents need not be submitted.


So, if you plan to liquidate a CFC, then there is a great opportunity to legalize your business and save on taxes. The first step towards realizing such a goal will be a professional consultation at Finevolution because you need to:


  • analyze the possibility of tax-free liquidation for your company;
  • to determine whether it is expedient to exist during the implementation of the BEPS plan when tax measures are becoming increasingly harsh;
  • initiate CFC liquidation procedure.


See you soon!

(Українська) Закон "Про віртуальні активи"

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