On May 21, Draft Law No. 1210 was signed by the President of Ukraine and became Law No. 466-IX, introducing significant changes to Ukraine's tax system. For businesses, the adoption of this anti-offshore legislation entails a new approach to dealing with non-residents. One of the key innovations is the introduction of state control over foreign companies owned or controlled by Ukrainian residents.
What Is a CFC?
With the adoption of Draft Law No. 1210, the concept of controlled foreign companies (CFCs) was introduced into Ukrainian legislation.
A CFC is a company registered abroad that is controlled by a resident of Ukraine. The CFC rules apply not only to legal entities but also to partnerships, trusts, funds, charitable organizations, and certain other structures.
If a Ukrainian resident owns or controls a company abroad, they must report it to the tax authorities and, in certain cases, pay tax in Ukraine.
In Which Cases Is a CFC Report Required?
A Ukrainian resident must submit a report on a foreign company if:
While the first two criteria are based on shareholding in the foreign company, the third has a broader meaning. A person may be recognized as exercising actual control if they have the ability to enter into agreements, dispose of the company's assets or funds held in its bank accounts, manage the company, or are identified to the bank as its beneficiary.
Accordingly, even if a Ukrainian resident owns a foreign company through a nominee structure but is identified to the bank as its beneficiary, a report on that company will still need to be submitted.
What Information Must Be Included in a CFC Report?
A CFC report must contain detailed information about the company, including its country of registration, ownership structure, income, employees, and movement of funds. Copies of the CFC's financial statements confirming the amount of its profit for the reporting year must be attached to the report.
Thus, the taxpayer must provide comprehensive information about their foreign company to the Ukrainian tax authorities.
Taxation of CFC Income
An additional obligation for owners of foreign companies will be the payment of tax on the CFC's undistributed profits. If undistributed profits remain in the CFC at the end of the reporting period, its owner will be required to pay 18% personal income tax and a 1.5% military levy in Ukraine.
However, there are several exceptions to this rule. CFC profits are not subject to taxation in Ukraine if:
Penalties for Violating CFC Requirements
The law provides for a number of circumstances in which the tax authorities may impose penalties for violations of the CFC rules:
For Which Period Will the First CFC Reports Be Submitted?
Ukrainian residents must submit their first CFC reports for the 2022–2023 period, with 2022 being the first reporting year. Although there is still time before the first reporting deadline, it is worth preparing in advance.
What Should Be Done Now to Make the First CFC Reporting Process Easier?
With the adoption of Law No. 466-IX, a new era of taxation is beginning in Ukraine. It will no longer be possible to simply hide funds in the accounts of offshore companies. The state will have significantly greater visibility over foreign corporate structures and assets held by Ukrainian residents and will be better equipped to identify attempts to conceal income from taxation.
However, the new rules are not as daunting as they may initially appear. With the right approach, there is still sufficient time to review and properly structure the foreign part of your business and prepare for the new reporting requirements.
What Is a CFC?
With the adoption of Draft Law No. 1210, the concept of controlled foreign companies (CFCs) was introduced into Ukrainian legislation.
A CFC is a company registered abroad that is controlled by a resident of Ukraine. The CFC rules apply not only to legal entities but also to partnerships, trusts, funds, charitable organizations, and certain other structures.
If a Ukrainian resident owns or controls a company abroad, they must report it to the tax authorities and, in certain cases, pay tax in Ukraine.
In Which Cases Is a CFC Report Required?
A Ukrainian resident must submit a report on a foreign company if:
- their share in the foreign company is 50% or more;
- their share in the foreign company, together with the shares held by other Ukrainian residents, is at least 10%, provided that Ukrainian residents collectively own 50% or more of the company;
- they exercise actual control over the foreign company.
While the first two criteria are based on shareholding in the foreign company, the third has a broader meaning. A person may be recognized as exercising actual control if they have the ability to enter into agreements, dispose of the company's assets or funds held in its bank accounts, manage the company, or are identified to the bank as its beneficiary.
Accordingly, even if a Ukrainian resident owns a foreign company through a nominee structure but is identified to the bank as its beneficiary, a report on that company will still need to be submitted.
What Information Must Be Included in a CFC Report?
A CFC report must contain detailed information about the company, including its country of registration, ownership structure, income, employees, and movement of funds. Copies of the CFC's financial statements confirming the amount of its profit for the reporting year must be attached to the report.
Thus, the taxpayer must provide comprehensive information about their foreign company to the Ukrainian tax authorities.
Taxation of CFC Income
An additional obligation for owners of foreign companies will be the payment of tax on the CFC's undistributed profits. If undistributed profits remain in the CFC at the end of the reporting period, its owner will be required to pay 18% personal income tax and a 1.5% military levy in Ukraine.
However, there are several exceptions to this rule. CFC profits are not subject to taxation in Ukraine if:
- The total annual turnover of all foreign companies controlled by a Ukrainian resident does not exceed EUR 2 million.
- The CFC is a public company whose shares are traded on a recognized stock exchange.
- A double taxation treaty is in force between Ukraine and the CFC's country of registration and one of the following conditions is met:
- the CFC actually pays corporate income tax in its country of registration at a rate of at least 13%;
- income received from dividends, interest, and royalties does not exceed 50% of the company's total income.
Penalties for Violating CFC Requirements
The law provides for a number of circumstances in which the tax authorities may impose penalties for violations of the 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 at the request of the tax authorities — a fine of up to UAH 2.1 million.
For Which Period Will the First CFC Reports Be Submitted?
Ukrainian residents must submit their first CFC reports for the 2022–2023 period, with 2022 being the first reporting year. Although there is still time before the first reporting deadline, it is worth preparing in advance.
What Should Be Done Now to Make the First CFC Reporting Process Easier?
- Analyze your foreign business structure and determine which companies are worth retaining and which should be 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. In many jurisdictions, a company is not automatically dissolved simply because annual fees have not been paid. The company and information about its beneficial owner may remain in the relevant registers, while the automatic exchange of tax information enables tax authorities in different countries to exchange the relevant data.
- Consider distributing the profits of your foreign companies. CFC profits are taxed at a rate of 19.5%, whereas dividends are subject to tax at a rate of 9% plus a 1.5% military levy.
With the adoption of Law No. 466-IX, a new era of taxation is beginning in Ukraine. It will no longer be possible to simply hide funds in the accounts of offshore companies. The state will have significantly greater visibility over foreign corporate structures and assets held by Ukrainian residents and will be better equipped to identify attempts to conceal income from taxation.
However, the new rules are not as daunting as they may initially appear. With the right approach, there is still sufficient time to review and properly structure the foreign part of your business and prepare for the new reporting requirements.