More than two years have passed since the adoption of Law of Ukraine No. 466-IX, which introduced controlled foreign company rules into the Tax Code of Ukraine. As of January 1, 2023, these provisions have come into full effect. What are the main implications of the new rules for Ukrainian residents who own or control foreign companies?
To begin with, let us briefly consider Law No. 466-IX and the changes it introduced to the Tax Code of Ukraine. The current version of the Tax Code, specifically Article 39-2, requires Ukrainian residents to submit annual reports on controlled foreign companies (CFCs) and, in certain cases, pay tax on the undistributed profits of their CFCs. Ukrainian residents are also required to notify the tax authorities of:
The new CFC rules were introduced into Ukrainian tax legislation gradually. The first requirement to take effect was the obligation to submit notifications regarding the establishment of new foreign companies or changes relating to existing ones. This obligation came into force on January 1, 2022, requiring Ukrainian residents to notify the tax authorities within 60 days of establishing a new company abroad or making relevant changes to an existing one. Due to martial law, the application of this requirement was temporarily suspended but was reinstated in November 2022. Accordingly, Ukrainian residents who established companies abroad in 2022 were required to submit the relevant notifications within 60 days from the date on which the obligation was reinstated.
Starting in 2023, another part of the CFC regime came into effect — the obligation to report on the financial results of controlled foreign companies. What does this mean in practice? Every owner or controller of a foreign company who is a tax resident of Ukraine must submit a CFC report to the Ukrainian tax authorities. Such a report is submitted together with the annual tax return on property and income (i.e., by May 1, 2023). The report must include the CFC's complete registration details and a copy of its financial statements.
The main purpose of the CFC regime is to ensure transparency of the foreign income of CFC owners and, where applicable, subject such income to taxation in Ukraine. In other words, Ukraine has introduced a mechanism allowing certain profits of foreign companies controlled by Ukrainian tax residents to be taxed in Ukraine. If undistributed profits remain at the CFC level at the end of the reporting period and no applicable exemption applies, the controlling person may be required to pay 18% personal income tax and a 1.5% military levy in Ukraine.
However, there are certain exemptions. Tax may not be payable if:
Thus, the taxation of a foreign company's profits may, in many cases, not result in a significant additional tax burden. However, non-compliance with CFC requirements may entail substantial penalties. The law establishes a clear list of circumstances in which penalties may be imposed on a taxpayer. Failure to submit a CFC report or the submission of incorrect or incomplete information may result in significant fines, potentially reaching UAH 2.7 million. Late payment of tax may also result in additional financial penalties.
Given that the Common Reporting Standard (CRS), which provides for the automatic exchange of financial account information, was introduced in Ukraine in 2023, the Ukrainian tax authorities have gained an effective mechanism for obtaining information on foreign financial accounts and assets associated with Ukrainian tax residents. Considering that CFC reporting is being submitted for the first time and that no established administrative practice has yet developed, there is limited time to prepare. By the end of April, it is necessary to prepare the CFC's financial statements, complete the required documentation, prepare the CFC report, and submit it to the tax authorities together with the relevant tax return. Therefore, to avoid potential negative consequences, it is advisable to address these matters in advance.
Keywords: CFC, controlled foreign companies, taxation of foreign companies, income declaration, Ukraine.
To begin with, let us briefly consider Law No. 466-IX and the changes it introduced to the Tax Code of Ukraine. The current version of the Tax Code, specifically Article 39-2, requires Ukrainian residents to submit annual reports on controlled foreign companies (CFCs) and, in certain cases, pay tax on the undistributed profits of their CFCs. Ukrainian residents are also required to notify the tax authorities of:
- the establishment or acquisition of new companies abroad;
- certain transactions or changes relating to such companies, including the sale or acquisition of shares and changes in their ownership or control structure;
- the liquidation of controlled foreign companies.
The new CFC rules were introduced into Ukrainian tax legislation gradually. The first requirement to take effect was the obligation to submit notifications regarding the establishment of new foreign companies or changes relating to existing ones. This obligation came into force on January 1, 2022, requiring Ukrainian residents to notify the tax authorities within 60 days of establishing a new company abroad or making relevant changes to an existing one. Due to martial law, the application of this requirement was temporarily suspended but was reinstated in November 2022. Accordingly, Ukrainian residents who established companies abroad in 2022 were required to submit the relevant notifications within 60 days from the date on which the obligation was reinstated.
Starting in 2023, another part of the CFC regime came into effect — the obligation to report on the financial results of controlled foreign companies. What does this mean in practice? Every owner or controller of a foreign company who is a tax resident of Ukraine must submit a CFC report to the Ukrainian tax authorities. Such a report is submitted together with the annual tax return on property and income (i.e., by May 1, 2023). The report must include the CFC's complete registration details and a copy of its financial statements.
The main purpose of the CFC regime is to ensure transparency of the foreign income of CFC owners and, where applicable, subject such income to taxation in Ukraine. In other words, Ukraine has introduced a mechanism allowing certain profits of foreign companies controlled by Ukrainian tax residents to be taxed in Ukraine. If undistributed profits remain at the CFC level at the end of the reporting period and no applicable exemption applies, the controlling person may be required to pay 18% personal income tax and a 1.5% military levy in Ukraine.
However, there are certain exemptions. Tax may not be payable if:
- The total annual income of all CFCs controlled by a Ukrainian resident does not exceed EUR 2 million.
- The CFC is a public company whose shares are listed on a recognized stock exchange.
- A valid double taxation treaty or tax information exchange agreement exists between Ukraine and the CFC's jurisdiction of registration, and one of the following conditions is met:
- the CFC pays corporate income tax in its jurisdiction of registration at an effective rate of at least 13%;
- passive income, including dividends, interest, and royalties, does not exceed 50% of the company's total income.
Thus, the taxation of a foreign company's profits may, in many cases, not result in a significant additional tax burden. However, non-compliance with CFC requirements may entail substantial penalties. The law establishes a clear list of circumstances in which penalties may be imposed on a taxpayer. Failure to submit a CFC report or the submission of incorrect or incomplete information may result in significant fines, potentially reaching UAH 2.7 million. Late payment of tax may also result in additional financial penalties.
Given that the Common Reporting Standard (CRS), which provides for the automatic exchange of financial account information, was introduced in Ukraine in 2023, the Ukrainian tax authorities have gained an effective mechanism for obtaining information on foreign financial accounts and assets associated with Ukrainian tax residents. Considering that CFC reporting is being submitted for the first time and that no established administrative practice has yet developed, there is limited time to prepare. By the end of April, it is necessary to prepare the CFC's financial statements, complete the required documentation, prepare the CFC report, and submit it to the tax authorities together with the relevant tax return. Therefore, to avoid potential negative consequences, it is advisable to address these matters in advance.
Keywords: CFC, controlled foreign companies, taxation of foreign companies, income declaration, Ukraine.