More than two years have passed since the adoption of Law of Ukraine No. 466-IX, which introduced provisions on controlled foreign companies into the Tax Code of Ukraine, and as of January 1, 2023, this provision has come into full effect. What are the main consequences of this Law that owners of foreign companies in Ukraine may experience?
To begin with, a brief overview of Law No. 466-IX and, in fact, the innovations to the Tax Code of Ukraine. The current version of the Tax Code, specifically its Article 39-2, provides that a resident of Ukraine must annually submit a report on controlled foreign companies (CFCs) and, in certain cases, pay tax on the undistributed profit of the CFC. An obligation has also arisen to notify the tax authorities of:
The new Law was integrated into Ukrainian tax legislation gradually — the first to take effect was the obligation to submit notifications regarding the establishment of new companies or changes to existing ones. This obligation came into force on January 1, 2022 — a resident of Ukraine was required to notify the tax authorities within 60 days of the registration of new companies abroad or of changes to existing ones. Due to the consequences of martial law in the country, the effect of this provision was suspended, but it was reinstated in November 2022. Accordingly, residents of Ukraine who established companies abroad in 2022 were required to submit the relevant notifications within 60 days from the date this obligation was reinstated.
Starting from the beginning of 2023, another part of the CFC obligations came into effect — reporting on the financial results of controlled foreign companies. What does this mean? Every owner/controller of a foreign company who is a tax resident of Ukraine must submit a report on controlled foreign companies to the tax authorities. Such a report is submitted together with the annual declaration of property status and income (i.e., by May 1, 2023). The report must include the complete registration details of the CFC and a copy of that company's financial statements.
The main purpose of CFC legislation is to control the foreign income of CFC owners, as well as to tax such income. In other words, the state has gained the right to tax the income of foreign companies owned by Ukrainians if taxes on such income have not already been paid in the country of registration. If undistributed profit remains on the CFC's balance sheet by the end of the reporting period, its owner is obligated to pay 18% personal income tax + 1.5% military levy in Ukraine.
However, there are exceptions. The tax is not payable if:
Thus, taxation of a foreign company's income is, in many cases, not a serious threat. The same cannot be said for the penalties for violating CFC requirements. The law establishes a clear and exhaustive list of circumstances under which fines may be imposed on a taxpayer — for failure to submit a report or for providing incorrect information, a fine of up to UAH 2.7 million applies. In the case of late payment of tax — 18% personal income tax, 1.5% military levy, and a fine of 25% of the amount owed.
Given that CRS (automatic exchange of tax information) came into effect in Ukraine starting in 2023, the tax authorities have gained a very effective resource for collecting information on the foreign income of Ukrainians. Considering that this year CFC reporting will be submitted for the first time, and there is no established administrative practice for this process, there is not much time left to prepare. By the end of April, it is necessary to prepare the CFC's financial statements, legalize them in Ukraine, draw up the report, and submit it to the regulatory authorities together with the tax declaration. Therefore, to avoid negative consequences, it is worth addressing this matter now.
Keywords: CFC, controlled foreign companies, taxation of non-residents, income declaration.
To begin with, a brief overview of Law No. 466-IX and, in fact, the innovations to the Tax Code of Ukraine. The current version of the Tax Code, specifically its Article 39-2, provides that a resident of Ukraine must annually submit a report on controlled foreign companies (CFCs) and, in certain cases, pay tax on the undistributed profit of the CFC. An obligation has also arisen to notify the tax authorities of:
- the registration of new companies abroad;
- any actions taken with respect to such companies (sale or purchase of shares in existing ones, changes in ownership or control structure);
- the liquidation of controlled foreign companies.
The new Law was integrated into Ukrainian tax legislation gradually — the first to take effect was the obligation to submit notifications regarding the establishment of new companies or changes to existing ones. This obligation came into force on January 1, 2022 — a resident of Ukraine was required to notify the tax authorities within 60 days of the registration of new companies abroad or of changes to existing ones. Due to the consequences of martial law in the country, the effect of this provision was suspended, but it was reinstated in November 2022. Accordingly, residents of Ukraine who established companies abroad in 2022 were required to submit the relevant notifications within 60 days from the date this obligation was reinstated.
Starting from the beginning of 2023, another part of the CFC obligations came into effect — reporting on the financial results of controlled foreign companies. What does this mean? Every owner/controller of a foreign company who is a tax resident of Ukraine must submit a report on controlled foreign companies to the tax authorities. Such a report is submitted together with the annual declaration of property status and income (i.e., by May 1, 2023). The report must include the complete registration details of the CFC and a copy of that company's financial statements.
The main purpose of CFC legislation is to control the foreign income of CFC owners, as well as to tax such income. In other words, the state has gained the right to tax the income of foreign companies owned by Ukrainians if taxes on such income have not already been paid in the country of registration. If undistributed profit remains on the CFC's balance sheet by the end of the reporting period, its owner is obligated to pay 18% personal income tax + 1.5% military levy in Ukraine.
However, there are exceptions. The tax is not payable 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 listed on global stock exchanges.
- There is a valid 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.
Thus, taxation of a foreign company's income is, in many cases, not a serious threat. The same cannot be said for the penalties for violating CFC requirements. The law establishes a clear and exhaustive list of circumstances under which fines may be imposed on a taxpayer — for failure to submit a report or for providing incorrect information, a fine of up to UAH 2.7 million applies. In the case of late payment of tax — 18% personal income tax, 1.5% military levy, and a fine of 25% of the amount owed.
Given that CRS (automatic exchange of tax information) came into effect in Ukraine starting in 2023, the tax authorities have gained a very effective resource for collecting information on the foreign income of Ukrainians. Considering that this year CFC reporting will be submitted for the first time, and there is no established administrative practice for this process, there is not much time left to prepare. By the end of April, it is necessary to prepare the CFC's financial statements, legalize them in Ukraine, draw up the report, and submit it to the regulatory authorities together with the tax declaration. Therefore, to avoid negative consequences, it is worth addressing this matter now.
Keywords: CFC, controlled foreign companies, taxation of non-residents, income declaration.