The topic of regulating and taxing Controlled Foreign Companies (CFCs) is increasingly attracting the attention of Ukrainian lawmakers. And it’s not surprising, as a large number of Ukrainians have companies abroad while remaining tax residents of Ukraine. Law No. 8137, which has been under consideration by the Verkhovna Rada (Supreme Council) since October 19, 2023, will bring numerous interesting changes to the taxation regulation of CFCs. Let’s break it down.
What’s new for CFCs in Law No. 8137
Let’s examine in detail what was and what will change:
- Changes to the conditions for recognizing a person as controlling
According to the new Law No. 8137, a company is recognized as controlling if a Ukrainian resident (individual or legal entity) as of December 31 of the respective calendar year:
- Owns a share in a foreign legal entity of 50 percent or more, or
- Owns a share in a foreign legal entity of more than 10 percent, provided that several Ukrainian resident individuals and/or Ukrainian resident legal entities own shares in the foreign legal entity, the combined value of which is 50 percent or more, or
- Individually or together with other Ukrainian residents – related parties – exercises actual control over the foreign legal entity.
In other words, as we can see, lawmakers are attempting to lower the threshold for obtaining CFC status, as this subtle change will certainly increase the quota of tax revenues.
Previously, there was no clarification in the law regarding the status on December 31 of each year, and everyone operated solely under the rule of “more than 50%”.
Therefore, if you managed to exit the CFC before the end of the year, you are not required to report on such CFC.
- The deadlines for recognizing the actual controller have been shortened
According to the new law, the validity period of a general power of attorney for the right to dispose of assets (acquisition, disposal) worth more than 10% without additional approval is reduced from 1 year to 183 days. In other words, if you have a power of attorney for a period of more than six months, you are considered a controller for such CFC.
- Penalties for failure to provide notification of a CFC, amounting to 300 minimum living wages, are canceled
However, there is a significant clarification in this provision: the amount of 300 minimum living wages is specifically canceled, and instead, lawmakers simply reduce it to 50. If converted into financial equivalent, it has been reduced from 805,000 UAH to 134,000 UAH.
Additionally, a rule is proposed according to which a penalty of 1 minimum living wage per day of delay, but not exceeding 25 minimum living wages, is imposed for the untimely notification of a CFC. Let’s provide the financial equivalent for clarity: the minimum living wage in 2023 is 2,684 UAH, so if the notification is delayed by 100 days, the maximum penalty would still be 25 minimum wages, which is 67,100 UAH.
We remind you that information about acquiring ownership rights and/or control over a CFC must be reported within 60 calendar (not working) days. Previously, the indication of the deadline, specifically in calendar days, was absent.
Furthermore, penalty sanctions for untimely notification of a CFC are not applicable from January 1, 2022, until the date of entry into force of this law.
- Are copies of documents canceled?
Previously, CFCs were required to provide copies of primary documents even if they had a financial audit report on the controlled foreign companies. This provision will change in the new law, so if an audit report is submitted together with the CFC report, there is no obligation to provide copies of documents.
However, it is worth noting that after submitting the CFC report, and if there are grounds, the tax authority may send a request for clarification and documents, and the CFC controller must provide a response with copies of the documents within two months.
- The “2 million euros” income limit for CFCs
Previously, in the law, the maximum figure of 2 million euros applied to the total aggregate income. However, the updated draft law introduces a new, refined criterion.
According to the updates, the income of up to 2 million euros is understood as the income from any activity for the reporting period of all controlled foreign companies under the control of one controlling person from all sources, which does not exceed the equivalent of 2 million euros for the reporting period.
Are you married and own a CFC?
We couldn’t overlook an interesting point in the future law, and yes, it concerns a potential complication called “MARRIAGE” 🙂
In Draft Law No. 8137, it is defined that the size of shares held by multiple controlling residents of Ukraine in a CFC is considered equal for tax calculation purposes. This applies to both actual control and joint ownership, where one person does not consider themselves a controlling person.
Under the wording of “joint ownership,” as stated by lawmakers, married couples who own a CFC easily fall into this category since, according to the law, all property, both movable and immovable, acquired during the marriage, is divided equally 🙂
However, let’s clarify how this is interpreted at the legislative level rather than just based on our words:
If multiple residents of Ukraine exercise actual control over a foreign legal entity, for tax calculation purposes, it is considered that the size of their shares in the controlled foreign company is equal unless it contradicts an agreement concluded between the controllers or a trust declaration issued by another resident of Ukraine who declares themselves as the ultimate beneficial owner.
What changes await Ukrainian CFCs in the Draft Law No. 8137
Cancellation of the “extended arm” principle
Previously, a CFC could act as a controlling person for its participants, allowing CFC participants to control foreign companies indirectly. With the new law, this “extended arm” principle will be abolished, meaning that a CFC can no longer act as a controlling person for its participants. These changes in the CFC law imply stricter and more detailed regulation and taxation of CFCs in Ukraine.
An additional innovation of Law No. 8137 is the exclusion of an article that establishes that the income and expenses of a controlled foreign company from transactions with non-resident related parties are determined following the “extended arm” principle.
Let’s explain this in simple terms – this new provision means that information about controlled transactions will not need to be included in the CFC report. This is a significant advantage because the process of preparing a report on controlled transactions with the corresponding documentary evidence and calculations is much more complex and resource-intensive than reporting on CFCs.
CFC Audits
And here’s an additional “gift” from the tax authority regarding CFC audits. According to the new regulations, the tax authority can conduct unscheduled documentary audits of individuals or businesses if there is information about undeclared CFCs.
You might wonder how the tax authority learns about this. It’s quite simple. We remind you that the law on Automatic Exchange of Information (CRS) has come into force, which helps the Ukrainian tax authority detect “hidden CFCs” and hold them accountable. Here are some examples of conditions under which the tax authority may conduct an unscheduled audit:
- The US tax authority has exchanged information through CRS, and the Ukrainian tax authority automatically receives this data. Or, the Ukrainian tax authority has received information upon request and discovered that a Ukrainian resident owns a CFC account and has not reported it in Ukraine.
- The second condition is that the CFC did not provide (or provided late) the notification of acquiring CFC status. And yes, we’re addressing your question about the delay. Even a delay of one day can subject you to a tax audit if you forgot or were unaware of the obligation to provide the notification within the specified timeframe mandated by the law.
We remind you that the deadline for submitting the CFC notification is 60 calendar (not working) days.
You can find more details and nuances in our article on CRS
However, there is good news compared to all the other conditions – the controlling authority is not allowed to conduct more than one audit of a controlling person within a three-calendar-year period.
Changes in the CFC report under Law No. 8137
According to the updates in the law, the CFC report will be submitted together with the asset and income statement for the year following the reporting period. This is a very important clarification.
For example, the CFC report for the year 2023 will be submitted together with the asset and income statement for the year 2024, the deadline for which is May 1, 2025. In other words, individuals are given an additional year to prepare the report.
Another notable feature of the updated draft law is the exclusion of the shortened CFC report.
If you need advice on submitting a CFC report or a CFC notification, please contact our team, which has been assisting CFC owners for over 5 years. Send a request through the form below or a message on Telegram/Viber, Whatsapp for consultations. Our working hours are 9:00-19:00 from Monday to Friday.
