On May 21, draft law 1210 was signed by the President of Ukraine and became Law No. 466-IX, updating Ukraine's tax system. For businesses, the adoption of this anti-offshore law entails a new procedure for working with non-residents. One of the key innovations is state control over the foreign companies of Ukrainian residents (CFCs).
What is a CFC?
With the adoption of Draft Law 1210, the concept of controlled foreign companies (CFCs) appeared in Ukrainian legislation.
A CFC is a company registered abroad that is controlled by a resident of Ukraine. The CFC category includes not only legal entities, but also partnerships, trusts, funds, and charitable organizations.
If a resident of Ukraine owns a company abroad, they must report this to the tax authorities and, in certain cases, pay taxes.
In which situations will it be necessary to submit a CFC report to the tax authorities?
A resident of Ukraine must submit reports on their foreign companies if:
While the first two criteria are determined based on simple shareholding participation in the foreign company, the third criterion has a broader definition. A person is recognized as a controller if they have the ability to conclude agreements, dispose of assets and bank accounts, manage the company, or are simply declared to the bank as a beneficiary. Accordingly, even if a resident of Ukraine owns a company registered abroad through a nominee, but is listed with the bank as the beneficiary — a report on this company will still need to be submitted.
What information needs to be indicated in CFC reports?
A CFC report must contain detailed information about the company, its country of registration, ownership structure, information on income, employees, and the movement of funds. Copies of the CFC's financial statements confirming the amount of the company's profit for the reporting year are attached to the report. Thus, the taxpayer must provide absolutely all information about their foreign company.
Taxation of CFC Income
An additional obligation for owners of foreign companies will be the payment of taxes on the CFC's undistributed profit. If undistributed profit remains in the CFC's account by the end of the reporting period, its owner is obligated to pay 18% personal income tax + 1.5% military levy in Ukraine.
However, this rule has several exceptions. The tax is not levied if:
Penalties for Violating CFC Requirements
The law contains a list of circumstances under which the tax authorities are entitled to impose fines on taxpayers for violating CFC rules:
For which period will the first CFC reports be submitted?
Ukrainians must submit their first CFC report for the period 2022–2023, meaning that 2022 will be the first reporting year. However much time remains, it is necessary to prepare for this now.
What is recommended to do now to make things easier when submitting the first CFC report:
With the adoption of Law 466, a new era of taxation is beginning in Ukraine. It will no longer be possible to hide money in the accounts of offshore companies. The state will now closely monitor the movement of Ukrainians' funds abroad and will put a stop to any attempts to shield funds from taxation. However, the law is not as frightening as it is made out to be. With the right approach, it is entirely possible to get the foreign part of your business in order in time and have no reason to fear any problems going forward.
What is a CFC?
With the adoption of Draft Law 1210, the concept of controlled foreign companies (CFCs) appeared in Ukrainian legislation.
A CFC is a company registered abroad that is controlled by a resident of Ukraine. The CFC category includes not only legal entities, but also partnerships, trusts, funds, and charitable organizations.
If a resident of Ukraine owns a company abroad, they must report this to the tax authorities and, in certain cases, pay taxes.
In which situations will it be necessary to submit a CFC report to the tax authorities?
A resident of Ukraine must submit reports on their foreign companies if:
- their share in the foreign company is 50% or more;
- their share in the foreign company, together with other residents of Ukraine, is at least 10% (totaling 50% or more);
- they exercise actual control over the foreign company.
While the first two criteria are determined based on simple shareholding participation in the foreign company, the third criterion has a broader definition. A person is recognized as a controller if they have the ability to conclude agreements, dispose of assets and bank accounts, manage the company, or are simply declared to the bank as a beneficiary. Accordingly, even if a resident of Ukraine owns a company registered abroad through a nominee, but is listed with the bank as the beneficiary — a report on this company will still need to be submitted.
What information needs to be indicated in CFC reports?
A CFC report must contain detailed information about the company, its country of registration, ownership structure, information on income, employees, and the movement of funds. Copies of the CFC's financial statements confirming the amount of the company's profit for the reporting year are attached to the report. Thus, the taxpayer must provide absolutely all information about their foreign company.
Taxation of CFC Income
An additional obligation for owners of foreign companies will be the payment of taxes on the CFC's undistributed profit. If undistributed profit remains in the CFC's account by the end of the reporting period, its owner is obligated to pay 18% personal income tax + 1.5% military levy in Ukraine.
However, this rule has several exceptions. The tax is not levied if:
- The total annual turnover of all foreign companies of a Ukrainian resident does not exceed EUR 2 million.
- The CFC is a public company whose shares are freely traded on global stock exchanges.
- There is a signed tax treaty between Ukraine and the CFC's country of registration; and one of the following two requirements is met:
- the CFC actually pays corporate income tax in its country of registration at a rate of no less than 13%;
- income received from dividends/interest/royalties does not exceed 50% of the company's total income.
Penalties for Violating CFC Requirements
The law contains a list of circumstances under which the tax authorities are entitled to impose fines on taxpayers for violating CFC rules:
- failure to submit a CFC report — a fine ranging from UAH 210,000 to UAH 2.1 million;
- late submission of a CFC report — a fine of up to UAH 105,000;
- failure to submit, or incomplete submission of, CFC documentation upon request from the tax authorities — a fine of up to UAH 2.1 million.
For which period will the first CFC reports be submitted?
Ukrainians must submit their first CFC report for the period 2022–2023, meaning that 2022 will be the first reporting year. However much time remains, it is necessary to prepare for this now.
What is recommended to do now to make things easier when submitting the first CFC report:
- conduct an analysis of your foreign business structure. Determine which companies are worth keeping and which are better closed;
- prepare and submit financial statements for all active companies;
- restore all "forgotten companies" and liquidate them in accordance with the procedure established by law. Many states do not close companies solely due to non-payment of the annual duty. The company and information about its beneficiary continue to be kept in the register, and the automatic exchange of tax information will allow countries to easily exchange all the necessary data;
- distribute the profits of your foreign companies. CFC profit is taxed at a rate of 19.5%, whereas receiving dividends is taxed at a rate of 9% + 1.5%.
With the adoption of Law 466, a new era of taxation is beginning in Ukraine. It will no longer be possible to hide money in the accounts of offshore companies. The state will now closely monitor the movement of Ukrainians' funds abroad and will put a stop to any attempts to shield funds from taxation. However, the law is not as frightening as it is made out to be. With the right approach, it is entirely possible to get the foreign part of your business in order in time and have no reason to fear any problems going forward.