In Ukraine, the topic of controlled foreign companies (CFCs) has long ceased to be just a “scarecrow” from the Tax Code. Tax authorities are increasingly checking businessmen who conduct activities abroad. Although penalties for violating reporting rules have been postponed, in the future they may unpleasantly hit even the most stable business.
The key problem is that the mere existence of a CFC is not something prohibited. But the tax office is always looking for a moment where the owner made a mistake — failed to submit a report on time, did not take into account a nuance in the company’s structure, or simply misjudged the risks.
Therefore, the task of the business owner is not only to “tick the box” and file a report, but also to build a system that minimizes the tax authority’s interest in the CFC. In other words — to make sure that the controlling bodies have no additional questions.
Why do CFC audits occur at all?
It is worth starting with the main point — the mere existence of a CFC is not a “red flag” for the tax office. Ukrainian legislation allows its residents to own a foreign company, and there is nothing illegal about it. Problems arise when the tax office sees risks or gaps in reporting. And for this, it already has enough tools.
Roughly speaking, the tax office pays attention to a business when:
- reporting CFC is not submitted on time or is submitted with obvious mistakes;
- CFC notifications are not filed;
- CFC income sharply differs from the declared income of an individual in Ukraine;
- the ownership structure looks like a classic offshore or without a clear business purpose;
- there is information from banks or international CRS exchanges that does not match the submitted data.
It is important to understand: the tax office does not necessarily come with an audit right away. At first, it may be an additional request, a demand to provide documents or explanations. But if these signals are ignored or responded to formally, the next stage is already a full audit with the risk of penalties.
Thus, the attention of the controlling bodies arises where the business leaves “traces of negligence.” A CFC that behaves transparently, fulfills all obligations, even despite the postponement of fines due to martial law, has much less chance of getting under the tax microscope.
CFC reporting: what cannot be ignored?
In Ukraine, clear rules apply to CFC owners:
- reporting must be submitted annually along with the individual/corporate income tax declaration;
- the report must reflect information about the company’s income, ownership structure, and also confirm who exactly is the controlling person;
- if the company pays taxes abroad, this does not exempt from reporting in Ukraine — disclosure of information here is crucial;
- submit notifications of changes in the status of the controlling person;
- pay taxes on your CFC in Ukraine (if grounds exist).
Typical mistakes that draw the tax magnifying glass to CFC owners:
- No CFC report submitted at all. Often this is the result of “who will ever find it.” The problem is, they do find it — through CRS, banks, or even public registries. The system is now quite automated and transparent, so for the STS it is not that difficult to find an undeclared CFC.
- Ignoring reporting on inactive companies. Owners often believe that if a CFC does not conduct business activities and has no turnover, then there is no point in reporting. In fact, the obligation to submit a report exists regardless of the company’s activity. In addition, financial statements are always attached to the report, even if they are “zero.”
- Incorrectly determining the controlling person. For example, indicating that the CFC belongs to a partner, although in reality it is controlled by another person. For the tax office this is an immediate red flag.
- Constant unprofitability with significant turnover. If the company demonstrates significant financial flows but systematically reports no profit, this naturally raises doubts from the tax authorities. Zero results with large turnover look like an attempt to artificially avoid tax burden. In such a situation, the STS questions the economic feasibility of the company’s existence and may require additional explanations and documentary proof of operations.
- Formal reporting without documents. If you declare income or expenses but cannot confirm them with contracts or invoices, this is a weak spot.
- “Empty” companies without substance. Modern tax authorities no longer believe in “empty companies.” If your CFC exists only on paper, and all management decisions are made from Ukraine, this looks like a tax optimization scheme, not a real business. And this is where the main risk arises — requalification of such a company as a permanent establishment in Ukraine.
Substance (economic presence) is proof that the company actually operates in its jurisdiction. For this, at least basic elements are needed: an office or coworking, a local director, several employees, a bank account, contracts, and expenses in that country. Without this, the CFC is perceived as a classic “mailbox.”
The problem with permanent establishment is that the tax office may decide: the company is effectively managed from Ukraine, and therefore it should pay taxes here. The consequences are obvious: the entire profit of the CFC may be reclassified as income of a Ukrainian resident, which means additional taxes and fines for “evasion.”
Thus, in 2025 an “empty” CFC without substance is no longer an additional protection but an invitation to an audit. Therefore, it is better to invest in the right structure now than to explain to the tax office later why your foreign business actually operated in Ukraine.
Fines for failure to submit or errors in the report start from tens of thousands of hryvnias, and in complex cases may exceed the CFC’s actual income. And most importantly — after the first such “red flag,” the company falls under the long-term scrutiny of the tax office. And although during martial law fines are not applied, the STS maintains its “blacklist” in advance, preparing to send its “letter of happiness.”
How does the tax office collect data about CFCs?
Many entrepreneurs still live in the paradigm “if the company is registered in Cyprus or Belize, then in Ukraine nobody will find out about it.” Unfortunately (or fortunately for the state budget), this era is long gone. Today, the tax office has fully working channels for obtaining information about any business abroad.
Where the STS gets data from:
- CRS exchange (Common Reporting Standard). Banks in more than a hundred countries automatically transmit account data, balances, and transactions to controlling authorities. That is, your account in Europe or Asia may already be in the Ukrainian tax base.
- Banking requests. When opening an account in a foreign bank, it often requires confirmation of tax residency. And this information may also end up in Ukraine.
- Partner jurisdictions. Many countries have signed tax information exchange agreements with Ukraine. And if your business “popped up” in a local registry or court case, this will definitely be known in Ukraine.
- Open sources. Company registers, sanctions lists, public databases of court decisions — the tax office actively monitors open information abroad.
Therefore, even if no one asks about your CFC today, tomorrow the CRS database will update, and your data will automatically appear in the system. That is, the tax office simply waits to see if you disclose the information yourself, and if not — then comes with arguments that are hard to ignore.
How to protect your CFC from audits?
The main task of a CFC owner is to ensure that the tax office simply has no desire to “dig deeper.” This is not about perfection but about minimizing risks. Therefore, we recommend following rather simple rules:
- Timely CFC reporting
Filing everything on time is already half the battle. The tax office often takes note of those who are late because this is the easiest for checking.
- Transparent business structure
If the company looks like a classic offshore, then explaining the business purpose will require double enthusiasm. It is better to immediately have a clear scheme with solid justification and with real substance. To avoid audits, you need to ensure a minimal level of substance: appoint a local director, delegate part of managerial functions to him, hold board meetings outside Ukraine, and document decisions. It may look like a formality, but it is exactly what saves from major tax claims.
- Documentation for every step
Invoices, contracts, acts — everything that confirms the reality of operations. Even if you run a cloud-based IT business, there must always be a paper trail, because the tax office looks exactly at the documents.
- No manipulation with income
Do not try to “play” with the financial result: overstate prices and at the end of the year show losses with million turnovers. Such a strategy looks illogical — turnover exists, but no profit. The tax office immediately sees signs of artificiality and starts asking questions.
- Regular audit
It is better once a year to spend time and money on a check by a lawyer or accountant than to later explain to the tax office why your report “does not quite add up.”
- Checking counterparties
The tax office often looks not only at the CFC itself but also at those with whom your CFC works. If a partner has already been noticed in optimization schemes or sanctions lists, then your CFC automatically comes under question. Here, basic due diligence can save from unnecessary problems.
- Professional support
To protect your foreign company from unnecessary audits, it is better from the very beginning to enlist the support of lawyers who already know in practice which gaps should be closed first.
A controlled foreign company by itself is not a problem. The problem becomes its owner if he forgets about reporting, tries to “mask” income, or neglects basic tax hygiene. The tax service today works not intuitively but systematically — with databases, international exchanges, and digital tools.
The good news is that protecting your CFC is realistic. It does not require super effort, just having a transparent structure, filing reports on time, documenting operations, and consulting lawyers from time to time. This not only reduces the risks of tax audits but also adds reputational weight to your business — you look like an owner who plays by the rules, not like a loophole seeker.
Therefore, a CFC is a tool. And like any tool, it can work for you or against you. It all depends on how skillfully you use it.
