GENERAL INFORMATION ABOUT CFC
From January 1, 2021, the rules of CFC- controlled foreign companies entered into force by Law No. 466-IX "On Amendments to the Tax Code of Ukraine regarding the improvement of tax administration, elimination of technical and logical inconsistencies in tax legislation".
These norms were adopted within the framework of the global “deoffshorization”, by introducing international standards of tax control in Ukraine for all participants in international trade, in accordance with Action Plan on Base Erosion and Profit Shifting (BEPS).
Thus, from 2021, a “new tax era” began for all foreign companies with connected persons from Ukraine.
WHAT IS A CONTROLLED FOREIGN COMPANY (CFC)?
A controlled foreign company is a legal entity (or other entity without such status: trusts, foundations, partnerships) registered in a foreign state and controlled by a resident of Ukraine.
A controlling person can be either an individual (ultimate beneficiary) or a legal entity resident in Ukraine (exercising direct or indirect control over the CFC).
A company is defined as a CFC if the controlling person meets one of the following criteria:
- owns a share in a foreign company in the amount of more than 50%;
- owns a share in a foreign company in the amount of more than 10% (for the reporting periods 2022-2023 more than 25%), provided that several individuals-residents of Ukraine and/or legal entities-residents of Ukraine own shares in a foreign company, the aggregate size of which is 50% or more;
- separately or together with other residents of Ukraine - related persons (for example, relatives) exercises actual control over a foreign legal entity.
Actual control (if a resident of Ukraine does not legally own the company) is determined if the person has the ability to significantly or decisively influence the decisions of the company (conclusion of agreements, disposal of assets and profits, termination of activities), regardless of the legal registration of such impact.
Additionally, the law introduces a number of signs by which the actual control over the company can be determined:
- the presence of a power of attorney from the company valid for a year or more;
- identification of a resident of Ukraine as a beneficiary of a company in a bank;
- the right to make decisions on behalf of the company without their approval by the board of the company;
- the right to receive part of the company's income;
- negotiating transactions by the company that are not subsequently approved by the board or incur a formal approval;
- carrying out transactions on the company's bank accounts or the ability to block transactions on such accounts.
OBLIGATIONS OF THE CFC
If a company meets the above CFC criteria under the new legislation, it has the following obligations:
1) Declare your CFC within 60 days of becoming a controlling person.
2) Submit the CFC report together with the annual return by May 1 of each calendar year.
3) Pay taxes established by Ukrainian legislation (unless tax exemption or other tax schemes apply).
At the same time, an individual (or a controlling person) is obliged to notify the tax authorities of Ukraine about the following:
- on the presence of foreign companies owned or controlled at the time of entry into force of the law;
- every acquisition of an share in a foreign company or the beginning of the exercise of tax control over a foreign company, which results in recognition as a controlling person;
- about establishment, registration or existing of a company without the status of a legal entity;
- on each alienation of a share in a foreign company or the termination of effective control over a foreign person, which leads to the loss of the status of a controlling person.
Controlled foreign companies represented by their controlling persons are required to file a report on their CFCs with the tax authorities.
The first such tax year will be 2022, which must be reported in 2023. The CFC report is submitted together with the annual declaration of property and income (for individuals) or the corporate income tax return (for legal entities).
Additionally, the financial statements of the CFC are also submitted, confirming the size of the turnover and profit of such a company for the reporting (tax) year. If the supervisory authority has doubts about the reliability of the submitted financial statements of the CFC, the supervisory authority has the right to require the submission of a written opinion of the audit company, which confirms the financial statements.
TAXATION OF CFC
CFC taxation applies to a portion of the adjusted profits of a controlled foreign company in proportion to the share held by the controlling person on the last day of the reporting period. The controlling person must independently calculate the profit taking into account its share in the company and on the basis of annual financial statements.
If the controlling person of a CFC is an individual, the following tax rates apply:
- 18% (personal income tax) + 1,5% (military tax) if the company's profit is not distributed (dividends are not paid);
- 9% (personal income tax) + 1,5% (military tax) if the CFC's profit is distributed to a Ukrainian person as dividends.
All adjusted profits of the CFC must be presented in the report in the national currency of Ukraine at the NBU exchange rate, respectively, the other currency must be converted into UAH.
CFC TAX EXEMPTION: TERMS AND CONDITIONS
The profit of a controlled foreign company is not subject to inclusion (is not taxed) in the total taxable income of the controlling person if there is a valid agreement on the avoidance of double taxation or on the exchange of tax information between Ukraine and the foreign jurisdiction, and at least one of the following conditions is met:
- CFC pays corporate tax at an effective rate of 18%, or at least 13% (5 percentage points less than the Ukrainian rate);
- the share of passive income of a CFC is no more than 50% of the total income from all sources.
Additionally, regardless of the fulfillment of the conditions above, the profit of a CFC is exempt from taxation in Ukraine if the company meets at least one criterion:
∙ The annual turnover of all CFCs of one controlling person is not more than 2 000 000 EUR.
∙ CFC is a public company whose shares are traded on a recognized stock exchange.
∙ CFC conducts charitable activities and does not distribute profits among the founders.
Moreover, an exemption from the payment of tax for a CFC is provided, in case of liquidation of the company within the established period - the beginning of the liquidation procedure no earlier than 01/01/2020, and its end - until 31/12/2021.
LIABILITY FOR CFC OBLIGATIONS - PENALTIES
For non-compliance with legal requirements for controlled foreign companies, liability is provided in the form of fines:
- for failure to submit a CFC report - 100 sizes of living wages (268 400 UAH);
- for late submission of the CFC report - 1 size of living wage for each day of delay, but not more than 50 sizes of living wages (2 684 UAH per day, but not more than 134 200 UAH);
- for failure to submit a CFC report within 30 days after the deadline for payment of fines - 5 sizes of living wages for each calendar day of failure to submit a CFC report, but not more than 300 sizes of living wages (13 420 UAH per day, no more than 805 200 UAH);
- for not displaying information about the CFC in the controlling person's report - 3% of the amount of the CFC's not displayed operations or 25% of the amount not displayed, the adjusted profit of the CFC, but not more than 1000 sizes of living wages (2 684 000 UAH);
- for failure to submit a notice on the acquisition/sale of a stake in a CFC - 300 sizes of living wages (805 200 UAH).
The size of a living wage is increasing annually, and therefore the sum of the above penalties will increase annually (these amounts are indicated with the calculation of the living wage for an able-bodied person as of January-June 2023 - 2684 UAH).
A fine for failure to submit a CFC report is imposed on the individual controller, who is responsible for penalties with all his property.
Thus, there are a lot of legislative intricacies of the functioning, reporting and taxation of CFCs in Ukraine, and they are individual. But, Campio Group specialists will help you to understand them, who will advise you on issues of foreign companies and develop a profitable plan of further actions for them.
If you need professional assistance in matters of reporting and taxation of profits of controlled foreign companies in Ukraine, contact the lawyers of Campio group for advice.
+38 (098) 737-88-88
We will help you to understand any issue of the tax legislation of Ukraine, as well as accompany your company at the stages of reporting and taxation.