The regulation and taxation of Controlled Foreign Companies (CFCs) is gaining momentum among Ukrainian legislators. This is no surprise, as many Ukrainians own companies abroad while remaining tax residents of Ukraine. Law No. 8137, under consideration by the Verkhovna Rada since October 19, 2023, introduces numerous changes to the tax regulation of CFCs. Let’s break it all down.
Key Changes for CFCs Under Law No. 8137
- New Criteria for Recognizing a Controlling Person
Under the new Law No. 8137, a company is considered a CFC if a Ukrainian resident (whether an individual or legal entity) as of December 31 of the relevant calendar year:
- Owns at least 50% of an offshore legal entity; or
- Owns more than 10% of an offshore legal entity, provided that multiple Ukrainian resident individuals and/or legal entities collectively own at least 50% of that entity; or
- Exercises actual control over the offshore entity, alone or with other related Ukrainian residents.
This legislative adjustment lowers the threshold for acquiring CFC status, which is expected to increase tax revenue.
Previously, there was no requirement to assess control as of December 31 each year—only the >50% rule applied. Consequently, if an individual exited a CFC before the end of the year, they would not need to report it.
- Reduced Timeframe for Recognizing Actual Control
The new law shortens the validity period of a general power of attorney granting disposal rights (for acquiring or selling assets worth more than 10%) without additional approvals from one year to 183 days.
The holder is deemed a CFC controller if a power of attorney exceeds six months.
- Reduction in Fines for Late CFC Notification
The penalty for failing to submit a CFC notification, previously 300 times the subsistence minimum, has been reduced to 50 times. In financial terms, this decreases the fine from 805,000 UAH to 134,000 UAH.
Additionally, a new rule introduces a daily fine of one subsistence minimum per late day, capped at 25 subsistence minimums. In 2023, the subsistence minimum is 2,684 UAH, meaning the maximum fine for a 100-day delay is 67,100 UAH.
Notably, penalties for late CFC notifications will not apply from January 1, 2022, until the law takes effect.
- Abolition of Mandatory Document Copies
Previously, CFCs were required to provide copies of primary documents even if they had submitted a financial audit report. The new law eliminates this requirement. Now, if an audited report accompanies the CFC report, there is no obligation to submit additional document copies.
However, if a tax authority deems it necessary, they may still request further explanations and documents, which must be provided within two months.
- CFC Income Threshold: €2 Million
The law initially set a €2 million income threshold for total aggregate revenue. However, the updated draft law clarifies that the threshold applies to:
The total revenue from all activities of all controlled foreign companies owned by a single controlling person from all sources does not exceed €2 million per reporting period.
CFC Ownership and Marriage Considerations
A particularly interesting provision in Law No. 8137 relates to marriage and joint ownership of CFCs.
The draft law states that when multiple Ukrainian residents exercise joint control over a CFC, their ownership shares are considered equal for tax purposes unless otherwise defined in an agreement between controllers or in a trust declaration where one declares themselves as the ultimate beneficial owner.
This has significant implications for spouses who jointly own a CFC. Under Ukrainian law, any property acquired during marriage is jointly owned, which means that even if one spouse does not recognize themselves as a controlling person, tax obligations may still apply.
Abolition of the “Arm’s Length Principle”
Another significant change is removing the provision requiring CFCs to adhere to the arm’s length principle when conducting transactions with related non-residents.
In simpler terms, CFCs will no longer be required to include controlled transactions in their reports. This is a significant benefit, as preparing a controlled transaction report is far more complex and resource-intensive than a standard CFC report.
CFC Audits and CRS Information Exchange
A critical update in Law No. 8137 is the introduction of unscheduled documentary audits of individuals or businesses if there is evidence of undeclared CFCs. How does the tax authority obtain this information? Ukraine has implemented the Automatic Exchange of Financial Information (CRS), which enables tax authorities to identify undisclosed CFCs and hold them accountable.
Tax authorities may initiate unscheduled audits under the following conditions:
- If the U.S. tax authority (IRS) shares data via CRS, Ukrainian authorities automatically receive this information.
- If the Ukrainian tax authority receives information upon request that a Ukrainian resident owns a CFC account but has not reported it in Ukraine.
Even a one-day delay in submitting a CFC notification can trigger an audit.
CFC notifications must be submitted within 60 calendar days.
However, the good news is that the tax authority cannot conduct more than one audit per controlling person within three calendar years.
Changes to CFC Reporting Requirements
Under the new law, CFC reports must be submitted with the annual property and income declaration for the year following the reporting year. For example, the 2023 CFC report must be filed with the 2024 property declaration by May 1, 2025. This effectively provides an additional year for taxpayers to prepare their reports. The shortened CFC report format has also been eliminated from the draft law.
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