Consultations on controlled foreign companies (CFCs)

What is a CFC?

Do I have to file CFC reports?

Does everyone have to file CFC reports? These and many other questions arise when it comes to CFCs.

On January 1, 2022, the concept of controlled foreign companies (CFCs) was introduced into the Tax Code of Ukraine.A controlled foreign company is any legal entity registered in a foreign state or territory that is recognized as being under the control of an individual resident of Ukraine or a legal entity resident of Ukraine, if such a resident is a resident of Ukraine:

• holds a share in a foreign legal entity in the amount of 50% or more, or
• holds a share in a foreign legal entity in the amount of 10% or more, provided that several individuals - residents of Ukraine and/or legal entities - residents of Ukraine hold shares in a foreign legal entity, the amount of which in the aggregate is 50% or more, or
• individually or together with other residents of Ukraine - related parties exercises actual control over a foreign legal entity.

Actual control implies a significant influence on the decisions of the relevant legal entity to enter into transactions, dispose of assets and profits, and terminate activities, regardless of the legal form of such influence.

The introduction of the concept of Controlled Foreign Company into the national legislation is related to the implementation by Ukraine of the Plan to Combat Base Erosion and Profit Shifting.

The above amendments to the legislation have resulted in a number of obligations for the owners of foreign companies:

Notify the tax authorities of the fact of acquisition or loss of control over the CFC, in particular: 

• When establishing/establishing a foreign company;
• When acquiring corporate rights/shares of a foreign company or starting to exercise actual control over a CFC;
• As a result of alienation/sale of corporate rights/shares of a foreign company;
• As a result of liquidation of a foreign company;

Submit annual reports on CFCs with the determination of tax liabilities. The reports are submitted annually, together with the CFC's financial statements and tax return on property status and income.

Pay taxes on CFC's profit established by the Ukrainian legislation. At the same time, the legislation establishes quite different requirements and peculiarities for calculating tax liabilities, as well as provides for cases of exemption from taxation of CFC's profits.

 Since these issues are quite complex and require professional analysis, CFC owners may have a number of questions, in particular:

• Analysis of the structure and determination of the CFC structure itself and potential risks for CFC owners;
• Expediency of liquidation of the CFC;
• Determination of the circle of controlling persons of the CFC;
• Occurrence of obligations in relation to the CFC (submission of notifications, formation and submission of reports on the CFC);
• Occurrence and calculation of tax liabilities from the CFC.

 It is worth noting that the legislation of Ukraine also establishes sanctions for violation of the rules for reporting on CFCs in the form of fines, which are significant.

 Thus, in particular, the following fines are provided:

•  For failure to submit a CFC report - a fine in the amount of 100 subsistence minimums (SM) for an able-bodied person established on January 1 of the tax (reporting) year, currently it is UAH 302,800.00;
•  For late submission of the CFC report - a fine in the amount of 1 SM for each calendar day of non-submission, but not more than 50 SM.

For failure to notify the CFC controller within 60 days of changes in the activities of the CFC or the exercise of actual control over the CFC, the creation of entities without the status of a legal entity - a fine of 300 subsistence minimums, currently it is UAH 908,400.00.