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CFC

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In 2020, rules for controlled foreign companies were approved at the legislative level to come in 2021. The event aroused great interest in the legal consequences among owners of foreign businesses.

 

We would like to remind you that the following laws regulate CFC rules in Ukraine:

 

 

The last Law, by the way, postponed the application of the CFC rules until 01.01.2022. Accordingly, the stage of preparing your business for the CFC rules is over, and it is time to really act to avoid any violations of the Law, possible fines, and other financial losses.

 

The main novelties of CFC in Ukraine

CFC is any legal entity (as well as without the status of legal entities, such as trusts, foundations, etc.) registered in a foreign jurisdiction controlled by a resident of Ukraine. In addition, such residents must:

  • own a share in a foreign company of more than 50% or 10% (50% or more if more than one resident owns such share);
  • perform the actual control on their own or together with other tax residents of Ukraine.

Thus, at the first stage, you need to determine whether your company falls under the status of CFC and you — under the status of the controlling person in relation to it. If yes, there are three responsibilities.

 

To submit reports on the acquisition/disposal of a CFC’s share

According to the draft order of the Ministry of Finance and the Law of Ukraine 466-IX, a resident of Ukraine (an individual or a legal entity) at the place of tax registration must send to the supervisory authority the specified report in a certain form.

 

The term of this obligation is 60 days from the date of

  • acquisition (beginning of the actual control)
  • or disposal (termination of the actual control) of a share in a foreign legal entity, property rights to assets, income or profit of an entity without legal personality
  • commencement/termination of actual control over a foreign legal entity.

 

File returns in 2023 (for 2022) or 2024 for the previous two years.

Pay taxes on the adjusted earnings of the CFC as reported in its unconsolidated financial statements for the calendar year under review.

 

Analyzing the CFC regulation legislation, it seems that you will not have any problems if you fulfill all your obligations. And indeed it does, because you will not violate the law in terms of CFC regulation. However, for foreign business owners, this is actually only the tip of the iceberg. We further explain why.

 

If the structure of the company is legally registered abroad, but its real activity and control are performed from the territory of Ukraine, i.e., it acquires the CFC status, the rules of tax law on permanent establishment and recognition of the foreign company as a tax resident of Ukraine come into effect.

 

In other words, the foreign company will be obliged to pay Ukrainian corporate tax at the rate of 18%

 

Special risks for those companies, which have in Ukraine staff providing services to non-residents for more than 183 days in any 12-month period. Another risk factor is the management of a foreign company from the territory of Ukraine, for example, the director may also be recognized as a permanent establishment. This means that the foreign company must register as a taxpayer in Ukraine.

CFCs during martial law in Ukraine

Our clients often ask us the following question: if they did not file a notice of the establishment of a CFC or changes in the company’s shares that occurred in 2022, are there any fines during martial law? We have prepared detailed material based on the response of the State Tax Service of January 2023.

What is the risk of recognition of a private company in Ukraine?

  • Penalty for non-resident activity without registration — 100000 UAH and penalties for failure to submit reports.
  • Sanctions through additional accrual of unpaid taxes.
  • In case of non-payment of large amounts of tax — administrative and, accordingly, criminal liability.

 

Now is the time to analyze the structure of your business, identify risks according to the innovations of tax legislation, develop a plan to reduce these risks, and implement them to make your business stable and successful. We will be happy to help.

We provide CFC consulting on the following issues:

  • Analysis of client’s business structure in terms of CFC legislation application
  • CFC reporting — when, how, and what to file
  • CFC notification
  • Taxation of CFC profit
  • Options for exemption of CFC profit from taxation in Ukraine
  • Determination of risks of recognition of permanent establishment and company as a tax resident of Ukraine
  • Liquidation of controlled foreign companies

Leave a request through the form below Viber, Telegram, WhatsApp to get a detailed consultation on Controlled Foreign Companies (CFC) in Ukraine

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