For many years, business owners have tried to evade taxes thanks to offshore zones — countries or jurisdictions with special conditions for doing business. But everything began to change in 2013 when several leading countries initiated the fight against such a “tax optimization tool.” Ukraine was not left out, so to not get into the blacklist of jurisdiction, it agreed to implement the minimum standard of BEPS rules developed by the Organization for Economic Cooperation and Development. One of the steps of implementing such rules is the development of effective control mechanisms for controlled foreign companies (CFCs).
Legislative level of CFCs
As of today, Ukraine adopted the Law of Ukraine “On amendments to the Tax Code of Ukraine regarding improvement of tax administration, elimination of technical and logical inconsistencies in tax legislation,” which regulated the legal institute of CFC. Taxation under the new rules was expected from the beginning of 2021. However, this idea was not supported by many experts, considering it premature.
The Law “On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine on Ensuring the Collection of Data and Information Necessary for Declaring Certain Objects of Taxation” postponed the application of CFC rules until 01.01.2022. And although the reporting for owners of foreign businesses has been postponed, it is still necessary to retrospectively familiarize yourself with the legislative innovations to avoid possible problems with the controlling authorities.
The CFC rules are relevant for individuals and legal entities — residents of Ukraine, who own or control the so-called foreign structures. In general, they must submit special reports and pay the established taxes.
The Law of Ukraine No. 466-IX introduces new terminology that defines a CFC as any legal entity registered in a foreign jurisdiction, which a resident of Ukraine controls. This also includes entities without the status of legal entities (trusts, foundations, etc.), which have some special conditions for acquiring CFC status and determining the controlling person for them. Thus, the legislator provides for cases when a person may be exempted from the application of the CFC rules.
Explaining the law on CFCs
CFC status arises if the controlling person (resident of Ukraine) owns a stake in a foreign company of more than 50% or 10% (50% or more if more than one resident owns the stake), exercises effective control independently or together with other Ukrainian tax residents.
The law provides for cases of actual control, and the presence of at least one makes you a controlling person under the CFC. These include: the fact that a person is specified by the founder when opening a company account, the performance or blocking of bank transactions on the bank accounts of a person, the existence of a power of attorney for more than one year to enter into material transactions, and the like.
Taxes for CFCs
If the foreign business is controlled in Ukraine according to the above signs, then you must pay taxes. In particular, the taxation of CFC profit for a legal entity will be at the basic rate of 18%.
For an individual, taxation will be at the following rate:
- Military fee — 1.5%;
- Personal income tax:
- 5% (if the profit of a CFC is received when distributing dividends from Ukrainian companies);
- 9% (when distributing dividends from Ukrainian collective investment institutions or business entities that are not taxpayers);
- 9% if an individual distributes profits from a CFC for reporting purposes;
- 18% for other cases.
The object of taxation at these rates is a part of the adjusted profit of a CFC in accordance with its unconsolidated financial statements prepared for the reporting calendar year.
For example, the founder of a foreign company with 50% of the share capital pays tax only on half of the total income of the company (from 100,000 EURO — 50,000 EURO is the adjusted profit for a Ukrainian resident, which is noted in the special individual reporting on a particular company). CFC reporting is submitted together with the annual declaration of property status and income. It states general information (name, address, etc.), information on the ownership structure, and other information.
Even if your business meets the status of a CFC, the law provides for cases where its adjusted profit is exempt from taxation. Specifically, if the CFC is:
- A public company whose shares are traded on a recognized stock exchange;
- A charitable organization without any entrepreneurial purpose;
- Total income from all CFCs of one resident does not exceed 2.000.000 EURO as of the end of the reporting year;
- And of course, if there is a double taxation treaty or information exchange between the countries (provided that the CFC pays tax at an effective rate of 13%, or the share of its passive income does not exceed 50% of the total income). Despite this, the controlling person is still obliged to submit reports (the first time this can be done in 2024 for the 2 previous years at once). In addition, a resident of Ukraine must notify the tax authority of the direct or indirect acquisition or termination of ownership/control of a CFC within 60 days from the date of the relevant event.
If you for some reason do not want to be in the status of a controlling person, Law No. 1117-IX provides for the liquidation of a CFC without tax consequences. The main condition for such liquidation is compliance with the deadline for its implementation (until the end of 2021, but for certain, CFCs can be postponed for another year). At the same time, you cannot apply a simplified liquidation procedure (the so-called Strike of), but only the classical one with a liquidator and a liquidation balance sheet.
In general, there are a lot of nuances. The foreign business owner should determine which companies fall under control, the financial consequences of their existence, and the advisability of owning them. It is also essential to analyze the legislation to avoid penalties when reporting. Therefore, do not ignore and prepare in advance, and Finevolution will provide professional assistance in determining the possible risks of a CFC.