Every day, we receive questions from clients about CFC reporting. Some of them have recently learned about CFCs, some are sure that they do not need to submit CFC reports.
In this regard, we would like to share information on this issue, draw the attention of foreign company owners to the existing legal requirements regarding CFCs and help them avoid possible fines in the future.
We would like to remind you that starting from January 01, 2024, all tax residents of Ukraine (individuals and legal entities) who have influence and control over foreign companies (own foreign companies) should pay attention to this issue and submit relevant reports on all controlled foreign companies (CFCs) owned by them to the tax authorities of Ukraine.
What is a CFC?
A controlled foreign company (hereinafter referred to as a CFC) is any legal entity registered in a foreign state or territory that is recognized as being under the control of a Ukrainian individual or a Ukrainian legal entity in accordance with the rules set forth in the Tax Code.
In simple words, if a resident of Ukraine owns a share in a foreign company, he/she is obliged to ensure the preparation of financial statements of such company and submit the relevant reports to the State Tax Service of Ukraine.
Is it obligatory to declare a CFC? What happens if I do not submit reports to a CFC?
Yes, the obligation to declare a CFC and submit the relevant reports arises for all residents of Ukraine, although there are exceptions, depending on the size of the share of a person who owns a foreign company
Failure to submit reports to a CFC is subject to huge fines.
For example, the main fines for failure to submit CFC reporting:
Failure of the controlling person to submit a CFC report - a fine of 100 times the minimum subsistence level for an able-bodied person established by law as of January 1 of the tax (reporting) year (UAH 302,800.00 as of January 1, 2024).
Late submission of the CFC report by the controlling person - a fine in the amount of one subsistence minimum for an able-bodied person established by law as of January 1 of the tax (reporting) year for each calendar day of non-submission, but not more than 50 subsistence minimums for an able-bodied person established by law as of January 1 of the tax (reporting) year (UAH 3,028.00 UAH per day, but not more than UAH 151 400.00).
When is it necessary to submit reports to the CFC?
In 2024, it is necessary to submit a report on a controlled foreign company for 2022 and 2023.
The deadline for submitting a CFC report for individuals is April 30, 2024 (simultaneously with the submission of an annual declaration of property and income of individuals).
How will the tax authorities find out that I have a CFC?
First of all, we would like to draw your attention to the fact that information about the beneficial owner of a foreign company can be found on the Internet, as many countries have open company registers. The tax authorities of many European countries, such as Poland, Estonia, Cyprus, the United Kingdom and others, can exchange information if they receive a request from the Ukrainian tax authorities. As a rule, the owner of a foreign company has open bank accounts, and in case of information exchange between countries, such information can be received by our tax authorities.
Is it worth it to expose yourself to large administrative fines if you can submit CFC reporting and eliminate risks for yourself and your business?
The current legislation provides for such an obligation, but there are exceptions that exclude such obligations.
According to the general rules, the controlling person is obliged to pay personal income tax in the amount of 18% and military duty in the amount of 1.5% of the amount of CFC's retained earnings for the reporting period. That is, if, according to the financial statements, the CFC earned profit in the reporting year that was not distributed among the owners, the owners have a corresponding obligation to pay taxes on the amount of the CFC's retained earnings.
But, the current legislation also provides for cases when a person is exempt from paying these taxes, namely:
the total aggregate income of all CFCs of the same controlling person from all sources according to the financial statements does not exceed the equivalent of EUR 2 million at the end of the reporting period;
the share of passive income of the CFC is not more than 50 percent of the total income of the controlled foreign company from all sources;
the CFC actually pays income tax at an effective rate that is not less than the basic (main) corporate income tax rate in Ukraine, or is less than such rate by no more than five percentage points (i.e., the corporate tax rate is not less than 13%).
Can I submit reports to the CFC myself?
Yes, of course. In your taxpayer account, you can find a reporting form and submit a report to the CFC yourself. You can find a lot of useful information about this on Youtube and on the Internet. However, we would like to draw your attention to the fact that according to the State Tax Service of Ukraine, in 2023 only 405 CFC reports in the short form and 495 CFC reports in the full form were submitted. In 2024, for many, CFC reporting will be submitted for the first time and currently there are many nuances in filling out some items of the report form, correct reporting and its submission. Therefore, we recommend that you contact specialists who have worked out the issues of preparing and submitting CFC reports and have already gained positive experience.
Should I submit a CFC report if I have an inactive company (or an offshore company that does not submit reports and does not operate)?
Yes, every CFC owner must file a CFC report, even if the company does not conduct any activity and has not filed reports in its country of registration. In this case, it will be necessary to prepare financial statements in accordance with international standards and submit the relevant CFC reports in Ukraine.
CFC notification and CFC reporting are the same thing?A CFC notification is a notification to the tax authorities about the acquisition (beginning of actual control) or alienation of a share (termination of actual control) by a resident of Ukraine in a foreign legal entity or property rights to a share in the assets, income or profit of an entity without the status of a legal entity.Simply put, if you have established a company abroad or withdrawn from the shareholders of a foreign company starting from January 1, 2022, you must submit such a notification to the State Tax Service of Ukraine within 60 days. That is, every time you register a foreign company or acquire a share in a foreign company, or alienate a share in a foreign company, or liquidate such a company altogether, you are obliged to notify the tax authorities of Ukraine. Unfortunately, most owners were not informed about the need to submit CFC notifications by local lawyers who assisted in the registration of a foreign company and did not submit CFC notifications to the tax authorities of Ukraine within the established time limits.
What are the penalties and are there any for failure to submit CFC notifications?
Yes, for failure to submit a notification of a CFC, the legislation provides for a fine in the amount of 300 times the subsistence minimum for an able-bodied person established by law as of January 1 of the tax (reporting) year (UAH 908,400.00 UAH as of January 01, 2024).
Can you help me with reporting on CFCs? Our specialists already have positive experience in preparing and submitting CFC reports to the tax authorities of Ukraine and can provide the following services:
- Analysis of the structure of your foreign companies
- Determination of the owners' obligations regarding CFC reporting
- Determination of reporting periods for each of the CFCs
- Preparation of CFC reports
- Preparation of annual property and income tax returns
- Support for submission of CFC reports
As a result, you will receive confirmation from the tax service, that the CFC report has been accepted without errors and, accordingly, you will properly fulfill your obligations to form and submit CFC reports.
