Under Law of Ukraine No. 466-IX, considerable attention is given to controlled foreign companies (CFCs). The introduction of new reporting obligations and potential taxation of the undistributed profits of CFCs in Ukraine has prompted many Ukrainian residents to reconsider whether maintaining their existing foreign corporate structures remains necessary.
In this article, we examine when the liquidation of a CFC may be appropriate and how such a liquidation can be carried out, using Cyprus as an example.
Following the adoption of the new CFC rules, many Ukrainian business owners began reviewing their foreign corporate structures. Companies that no longer serve their intended purpose may reasonably be considered for liquidation. However, the liquidation of a foreign company may result in the distribution of its remaining assets to its shareholders or beneficiaries, potentially giving rise to income and corresponding tax consequences in Ukraine.
At the time, the new legislation provided for a transitional regime allowing qualifying individuals to receive assets upon the liquidation of certain foreign companies without paying Ukrainian personal income tax on the liquidation proceeds, provided that the applicable statutory conditions and deadlines were met. To benefit from this regime, the liquidation had to be initiated within the prescribed period and the required documents had to be submitted to the Ukrainian tax authorities together with the individual's tax return.
If you have decided that a foreign company is no longer required, it is important to ensure that the closure procedure is carried out properly. Below, we consider the main options for terminating a Cyprus company.
A Cyprus company may generally be terminated through a members' voluntary winding up or removed from the Register of Companies through a strike-off procedure. Although both mechanisms ultimately result in the company ceasing to exist, they differ significantly in terms of procedure, timing, and legal consequences.
Strike-Off
Strike-off is a simplified procedure generally suitable for companies that have ceased operations and do not intend to conduct business in the future.
The company applies to the Registrar of Companies for removal from the Register. Before the application is submitted, the company's affairs should be properly brought to an end, including, where applicable, closing bank accounts, settling outstanding liabilities, disposing of or distributing remaining assets, paying applicable taxes and government fees, and filing outstanding tax returns and financial statements.
Upon receiving the application, the Registrar initiates the strike-off procedure and publishes the relevant notice in the Official Gazette. If no objections are raised within the applicable period, the company may subsequently be removed from the Register.
In practice, the strike-off process may take several months. It should also be taken into account that the Cyprus tax authorities or other interested parties may object to the company's removal from the Register while outstanding tax matters remain unresolved. Such an objection may delay completion of the procedure until the company's tax affairs have been reviewed and settled.
Strike-off is therefore generally most suitable for dormant or inactive companies that have no material assets, liabilities, ongoing business activities, or unresolved tax matters.
Voluntary Winding Up
A members' voluntary winding up is a formal liquidation procedure used to bring the company's affairs to an end under the supervision of a liquidator. This may include closing bank accounts, settling liabilities, paying taxes and other amounts due, realizing or distributing assets, and preparing the required reports.
The procedure begins with the adoption of the necessary corporate resolutions. A liquidator is appointed to take control of the liquidation process, settle the company's affairs, deal with creditors and liabilities, and distribute the remaining assets in accordance with applicable law.
Following the appointment of the liquidator, the powers of the company's directors generally cease to the extent provided by law and the relevant corporate resolutions. The liquidator then carries out the liquidation and prepares the required accounts and reports.
Once the company's affairs have been fully wound up, the liquidator prepares a final account explaining how the liquidation was conducted and how the company's property was dealt with. A final general meeting is then convened in accordance with the statutory procedure, after which the required documents are filed with the Registrar of Companies. Following completion of the applicable statutory period, the company is dissolved.
Compared with strike-off, voluntary winding up is a more formal and comprehensive procedure. It may therefore be more appropriate for companies that have assets to distribute, liabilities to settle, or a more substantial history of operations.
If a decision has been made to discontinue a foreign company's activities, simply abandoning the company should not be treated as an alternative to proper liquidation. Failure to maintain or formally terminate the company may result in continuing corporate, tax, reporting, and administrative obligations in its jurisdiction of incorporation and potentially in the jurisdiction of tax residence of its controlling persons.
The increasing international exchange of financial and corporate information also makes reliance on the non-disclosure of a foreign company an increasingly ineffective and risky approach. Foreign corporate structures should therefore be properly reviewed and, where they no longer serve a legitimate business or asset-holding purpose, formally terminated using the appropriate legal procedure.
In this article, we examine when the liquidation of a CFC may be appropriate and how such a liquidation can be carried out, using Cyprus as an example.
Following the adoption of the new CFC rules, many Ukrainian business owners began reviewing their foreign corporate structures. Companies that no longer serve their intended purpose may reasonably be considered for liquidation. However, the liquidation of a foreign company may result in the distribution of its remaining assets to its shareholders or beneficiaries, potentially giving rise to income and corresponding tax consequences in Ukraine.
At the time, the new legislation provided for a transitional regime allowing qualifying individuals to receive assets upon the liquidation of certain foreign companies without paying Ukrainian personal income tax on the liquidation proceeds, provided that the applicable statutory conditions and deadlines were met. To benefit from this regime, the liquidation had to be initiated within the prescribed period and the required documents had to be submitted to the Ukrainian tax authorities together with the individual's tax return.
If you have decided that a foreign company is no longer required, it is important to ensure that the closure procedure is carried out properly. Below, we consider the main options for terminating a Cyprus company.
A Cyprus company may generally be terminated through a members' voluntary winding up or removed from the Register of Companies through a strike-off procedure. Although both mechanisms ultimately result in the company ceasing to exist, they differ significantly in terms of procedure, timing, and legal consequences.
Strike-Off
Strike-off is a simplified procedure generally suitable for companies that have ceased operations and do not intend to conduct business in the future.
The company applies to the Registrar of Companies for removal from the Register. Before the application is submitted, the company's affairs should be properly brought to an end, including, where applicable, closing bank accounts, settling outstanding liabilities, disposing of or distributing remaining assets, paying applicable taxes and government fees, and filing outstanding tax returns and financial statements.
Upon receiving the application, the Registrar initiates the strike-off procedure and publishes the relevant notice in the Official Gazette. If no objections are raised within the applicable period, the company may subsequently be removed from the Register.
In practice, the strike-off process may take several months. It should also be taken into account that the Cyprus tax authorities or other interested parties may object to the company's removal from the Register while outstanding tax matters remain unresolved. Such an objection may delay completion of the procedure until the company's tax affairs have been reviewed and settled.
Strike-off is therefore generally most suitable for dormant or inactive companies that have no material assets, liabilities, ongoing business activities, or unresolved tax matters.
Voluntary Winding Up
A members' voluntary winding up is a formal liquidation procedure used to bring the company's affairs to an end under the supervision of a liquidator. This may include closing bank accounts, settling liabilities, paying taxes and other amounts due, realizing or distributing assets, and preparing the required reports.
The procedure begins with the adoption of the necessary corporate resolutions. A liquidator is appointed to take control of the liquidation process, settle the company's affairs, deal with creditors and liabilities, and distribute the remaining assets in accordance with applicable law.
Following the appointment of the liquidator, the powers of the company's directors generally cease to the extent provided by law and the relevant corporate resolutions. The liquidator then carries out the liquidation and prepares the required accounts and reports.
Once the company's affairs have been fully wound up, the liquidator prepares a final account explaining how the liquidation was conducted and how the company's property was dealt with. A final general meeting is then convened in accordance with the statutory procedure, after which the required documents are filed with the Registrar of Companies. Following completion of the applicable statutory period, the company is dissolved.
Compared with strike-off, voluntary winding up is a more formal and comprehensive procedure. It may therefore be more appropriate for companies that have assets to distribute, liabilities to settle, or a more substantial history of operations.
If a decision has been made to discontinue a foreign company's activities, simply abandoning the company should not be treated as an alternative to proper liquidation. Failure to maintain or formally terminate the company may result in continuing corporate, tax, reporting, and administrative obligations in its jurisdiction of incorporation and potentially in the jurisdiction of tax residence of its controlling persons.
The increasing international exchange of financial and corporate information also makes reliance on the non-disclosure of a foreign company an increasingly ineffective and risky approach. Foreign corporate structures should therefore be properly reviewed and, where they no longer serve a legitimate business or asset-holding purpose, formally terminated using the appropriate legal procedure.