Controlled foreign company (CFC): notification, reporting and taxation procedures

After the introduction of the so-called anti-offshore legislation in Ukraine (within the framework of Law No. 466-IX), a new stage of fiscal control has begun for business owners abroad. We are talking about rules of controlled foreign companies (CFCs)starting in 2022, will oblige Ukrainian residents to report their foreign assets and pay taxes on the profits of such companies.

In this article, we will look at who is obliged to report, how to determine the CFC, what are the deadlines for submitting notifications and reports, how taxation is calculated, and what risks are foreseen for non-compliance.

What is CFC?

Controlled foreign company (CFC) - is any legal entity or other entity (trust, foundation, etc.) registered outside Ukraine that is controlled by a Ukrainian resident - an individual or legal entity.

Who is considered a controller?

A CFC is considered to be a controller:

• a person who owns directly or indirectly 50% and more corporate rights of the company;

• a person who owns more than 10%, provided that the aggregate share of all residents of Ukraine is 50% or more;

• a person who carries out actual control over the company (even without formal shareholding).

What should be reported?

Residents of Ukraine who have control over a CFC must:

1. Report the presence of CFCs - a separate notification is submitted to the tax authorities.

2. Submit a CFC report - together with the annual tax return.

3. Pay the tax from the CFC's profit, if it was not taxed abroad or does not fall under the exceptions.

Deadlines for submitting a CFC notification

The notification is submitted within 60 days from the date:

• Acquisition of control over the company;

• creation of a new CFC;

• obtaining the status of a tax resident of Ukraine.

CFC reporting: when and how?

The CFC report is submitted to together with the annual tax return an individual - until May 1 of the following year.

For example: based on the results of 2024, the CFC report must be submitted to May 1, 2025.

The report states:

• information about the CFC (name, country of registration, type);

• CFC's financial statements for the relevant year;

• the controller's shareholding;

• calculation of the CFC's profit and its distribution.

Taxation of CFCs

The profit of a CFC may be taxed in Ukraine at the rate of taxation:

• 18% - standard income tax rate;

• 5% - if a person chooses the simplified taxation regime for a part of the CFC's profit that is withdrawn in the form of dividends.

A part of the CFC's profit proportional to the controller's share is taxed.

When is a CFC not taxable?

CFC's profit is not taxed if:

• The CFC is registered in a country with which Ukraine has a double taxation treaty;

• CFC paid the tax at an effective rate not lower than 13%;

• The CFC is a public company or has the status of a holding/financial structure with limited functionality (subject to additional conditions).

What documents should be prepared?

1. Notification of CFC to the State Tax Service

2. CFC's financial statements in accordance with international standards

3. Proof of control or ownership structure

4. Calculation of CFC's profit according to Ukrainian legislation

5. Tax return of the controller

Liability for violations

There are significant fines for non-compliance with CFC rules:

• 300 subsistence minimums (~ UAH 900 thousand) - for failure to submit a CFC report;

• 100 subsistence minimums - for failure to report a CFC;

• 5% of the amount of CFC's tax-free profit - for non-payment of tax.

It is also possible that additional tax will be assessed based on the results of an audit, litigation and asset freezes.

How to prepare for reporting?

To avoid risks, we recommend:

• Analyze the ownership structure business abroad;

• Determine whether there is a CFC and who is its controller;

• Estimate the effective tax rate in the country of registration of the CFC;

• Prepare documentation for submitting the notification and report;

• If necessary - to restructure the businessto reduce the tax consequences.

Legal support from Axel Legal

Team. Axel Legal has practical experience in supporting Ukrainian entrepreneurs who own businesses abroad. We offer:

• analysis of the ownership structure;

• preparation of CFC reports;

• assessment of tax consequences;

• support in dealing with tax authorities;

• protection in case of inspections or disputes.

Conclusions.

The regime of controlled foreign companies is a complex but manageable process. The main things are. Identify liabilities in a timely manner, properly execute documents and avoid fines. If you have a business or assets abroad, do not delay your consultation.

Contact Axel Legal - we will make sure that your international structure works legally, transparently and without risks.