In 2024, the legislation of Ukraine regulating the activities of controlled foreign companies (CFCs) underwent certain changes. Namely, Law of Ukraine No. 3706-IX came into force. It suspended the imposition of penalties for CFC reporting violations until the end of martial law in Ukraine, with an additional six-month grace period afterward.

 

However, does this mean that entrepreneurs can simply forget about their direct obligations and not pay any penalties? The Law does not provide a definitive answer to this question. However, the State Tax Service (STS) and the Ministry of Finance believe that after the end of the specified period, penalties may be imposed for the entire duration of martial law. Hence, staying vigilant is essential.

 

In this material, we have prepared information that will help you avoid CFC penalties and conduct your business abroad without unnecessary problems.

 

What is a CFC and Why is it Important to Comply with the Rules?

Controlled foreign companies are structures registered outside of Ukraine that are partially or fully owned by its resident.

 

The controlling party of such a company may be either a natural person or a legal entity with the ability to impact its operations and make key business decisions. That is, it is necessary to comply with one of the following conditions:

 

  • an ownership share of 50% or more;
  • an ownership share of at least 10%, provided that all residents of Ukraine collectively own more than 50% of the company;
  • direct influence on the operations of the structure (having a power of attorney to conclude transactions, managing bank accounts, controlling the distribution of profits, etc.).

 

Recognition as a controller imposes certain responsibilities on the person. These responsibilities include the timely submission of tax and financial reporting, as well as the payment of tax on the CFC’s profits, unless an exemption is provided.

 

The CFC rules came into force in the country in 2022 as part of efforts to combat the erosion of the tax base and the shifting of profits out of taxation. Why is compliance critically important? The main argument for owners of foreign businesses is the CFC penalty, which can become an unforeseen expense if the existing requirements are ignored.

 

How to Prepare in Advance for the CFC Reporting Period?

Before discussing early preparation for submitting CFC reports, it is necessary to mention the deadlines established by law:

 

  • The notification about the existence of a CFC must be submitted by May 1 of the year following the reporting period. It is important to note that the report must be submitted annually, even if the company did not earn any profit from its activities.
  • Individuals must submit financial reports by May 1 of the year following the reporting year, while the deadline for legal entities is March 1.
  • An additional notification in case of any changes in participation in a CFC must be submitted within 60 days from the date of the event.

 

To meet these deadlines, start preparing in advance. To do so, follow these recommendations:

 

  1. Make sure that you are required to submit CFC reports. To be obligated, you must be a resident of Ukraine and either formally or actually control a foreign company.
  2. Request the necessary financial documentation. This includes the balance sheet, profit and loss statement, and other documents for the reporting period. It is important to ensure that their format complies with the requirements of Ukrainian legislation.
  3. Analyze the country of registration of the CFC. In some countries, businesses may be eligible for certain benefits. For example, a double taxation avoidance agreement with Ukraine, automatic exchange of tax information, and a corporate income tax rate of ≥13% abroad may exempt you from paying taxes in Ukraine.
  4. Check whether your profits are subject to taxation. In addition to the above-mentioned benefits, you are also exempt from profit tax if the total annual profit does not exceed 2 million euros.
  5. Consult a specialist. Errors in reporting are one of the reasons for penalties for CFC rule violations. As a result, it is recommended to seek legal advice in advance for preparing your reports. If desired, you can also seek professional assistance in the process of preparing and submitting the documents.

 

Next, we will take a closer look at what inaccuracies may occur in the Notification of a CFC and other reports.

 

Main Errors When Submitting CFC Reports

How can you avoid penalties when submitting CFC reports in Ukraine? Timely submission of the required documents is not enough. It is also necessary to complete them correctly.

 

Let us consider the most common mistakes made by controllers:

 

  • Ignoring indirect ownership. Entrepreneurs often fail to account for indirect control over a company through other enterprises or trusts. They believe that the absence of direct participation exempts them from reporting obligations. However, this is not the case. If the tax authorities establish the fact of control, a penalty will be imposed.
  • Errors in calculating adjusted profit. For example, active and passive income may be incorrectly allocated. Companies also often confuse the concepts of financial result and taxable profit.
  • Lack of supporting documents. It will not be possible to avoid penalties if you fail to substantiate the data stated in the report. Among other things, you may be required to provide financial statements, corporate documents, certificates of tax payments abroad, and so on.
  • Providing incomplete information. For example, a controller may omit details about transactions with non-residents, the location and type of activity of a permanent establishment, etc.
  • Entering incorrect data. Errors may occur in country or currency codes, date formats, or inconsistencies between the full and abbreviated versions of the report.
  • Technical problems. To avoid them, be careful when filling out the electronic form, signing the digital report using an electronic signature (CEP), uploading documents, etc.

 

To avoid mistakes when preparing reports on the activities of a controlled foreign company, it is advisable to seek assistance from experienced lawyers. They will assist in making the reporting process more efficient and straightforward.

 

Liability and Penalties for Violating CFC Rules

In addition to mistakes made in the reports, entrepreneurs may also fail to submit CFC reports altogether or submit them late. Let’s examine the responsibility associated with each type of violation.

 

Failure to Submit a CFC Notification

This fine will apply if the controller does not notify the regulatory authorities about changes in the CFC ownership structure within the prescribed 60-day timeframe from the date of the occurrence. The fine may amount to as much as 300 subsistence minimums (SM). As of 2025, this is approximately UAH 900,000.

 

Failure to Submit a CFC Report

Failure to submit a CFC report is also subject to a fine. Its amount is slightly lower — 100 subsistence minimums (SM). Thus, in 2025, such a violation would result in a fine of approximately UAH 300,000.

 

Late Submission of a CFC Notification

If you submit the notification late, this fact is treated as a failure to submit the document. Accordingly, you will have to pay a fine of 300 SM for each identified violation.

 

Late Submission of a CFC Report

In this case, the law is more lenient toward entrepreneurs. Penalties are applied for submitting a CFC report after the specified deadline, calculated at a rate of 1 SM for each calendar day of delay. Please note. The total fine amount cannot exceed 50 subsistence minimums.

 

Incomplete CFC Reporting

Providing incomplete data results in a fine of 3% of the income amount or 25% of the adjusted profit. The choice will depend on which value is greater, but the imposed fine must not exceed 1000 SM.

 

Refusal to Provide CFC Documents Upon Request

If the controlling authority issues a request, the CFC owner must provide a comprehensive response within one month. Failure to comply will result in a fine equal to 3% of the company’s income. The maximum fine is capped at 1000 subsistence minimums (SM).

 

Delay in Reporting After Sanctions Are Imposed

Such a fact may be regarded by the tax authorities as intentional tax evasion. In this situation, additional tax may be assessed at the maximum rate, the taxpayer’s number may be blocked, and even criminal liability may follow.

 

How to Minimize Risks and Avoid CFC Penalties?

To minimize potential problems, follow some tips for conducting business abroad:

 

  • Monitor deadlines. As you can see, penalties threaten not only those who completely fail to submit CFC reports. Even a slight delay can lead to negative consequences for the company.
  • Carefully verify information. Double-check the data that you are going to include in the report several times. Even minor inaccuracies can attract the attention of regulatory authorities.
  • Track changes in legislation. Think you know all the intricacies of tax and CFC reporting regulations? We hasten to assure you — this does not guarantee protection from penalties. New rules could be implemented at any moment.
  • Seek professional legal assistance. If you do not have enough time to study all the nuances yourself, enlist expert support. For example, the professionals at AA Lawrange will not only simplify the preparation of reports but also assist with other issues — such as appealing CFC penalties.

 

Next, we will look in more detail at situations where legal assistance becomes indispensable.

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When Should You Seek Legal Assistance?

Control over a foreign company is already a sufficient reason to seek legal assistance. However, there are cases where it becomes truly essential. Let’s discuss the most common ones.

 

  • Complex ownership structure. Enlist professional support if the CFC is part of a holding, trust, investment chain, or other similar structures. Problems may also arise when it comes to indirect, nominal control or ownership through trustees.
  • Disputed need to submit reports or pay taxes. Are you unsure about the CFC status, have not carried out any activities, incurred losses, or found yourself in another ambiguous situation? Experts in taxation, accounting, and law will help clarify the situation.
  • Problems with calculating taxable profit. Incorrect indication of adjusted profit is one of the most common mistakes when submitting CFC reports. To avoid penalties, entrust this challenging task to professionals.
  • Missed reporting deadlines. Failure to meet reporting deadlines. If the deadline has passed and the documents remain incomplete, seeking legal assistance is the most effective course of action. Experienced lawyers are the ones who can help reduce the consequences and ease communication with the tax authorities.
  • A request was received from the State Tax Service of Ukraine (STSU). If the tax authority demands additional documents, explanations, or initiates an audit of your CFC, it is time to seek legal support. This will help you formulate the correct response to the regulatory body and, if necessary, challenge the actions of the STSU.
  • Planned change in the CFC ownership structure. Are you looking to sell your stake in the company? Transfer assets? Or perhaps liquidate the CFC? Competent lawyers will help you do this legally and without tax losses.
  • Risk of criminal liability. There are situations when the owner of a foreign company is suspected of deliberate tax evasion. They may face additional charges under CFC rules amounting to several million hryvnias or even criminal liability. In such a case, you cannot do without the protection of your interests by a legal professional. They will help with pre-trial settlement, filing appeals, and representing you in court if necessary.

 

As you can see, seeking legal assistance is an indispensable condition for the trouble-free operation of a CFC in the most challenging situations. The main thing is to choose a reliable law firm.

 

How Lawrange Can Become Your Legal Partner

AA Lawrange specializes in conducting business abroad, including the activities of Controlled Foreign Companies (CFCs). By contacting us, you will receive the following advantages:

 

  • Extensive experience that we are prepared to leverage for the success of your business.
  • Comprehensive support in matters of law, accounting, and taxation.
  • An individual approach, where we take into account your specific situation, regardless of its complexity.

 

Contact our manager for a consultation and ensure guaranteed compliance with the requirements concerning foreign business activities!

 

Conclusions

Is a controller of a foreign company at risk of penalties for failure to submit CFC reporting?

 

At the moment, the imposition of penalties has been suspended due to the martial law in force in Ukraine. However, this does not mean that notifications and reports can be neglected. After the expiration of the period established by law (the period of martial law + six months), penalties will be fully reinstated.

 

Therefore, we recommend fulfilling all your CFC obligations in full. Need help? Contact AA Lawrange. We know how to make your life easier.

 

FAQ

How often should CFC reports be submitted to avoid penalties?

The controller of a foreign company must prepare several reports, with different submission deadlines. The notification of the existence of a CFC must be submitted by May 1 of the year following the reporting year. Financial reports must be submitted by May 1 if the controller is an individual, and by March 1 if the controller is a legal entity. Any changes in the ownership structure of the CFC must be reported within 60 days.

 

Will there be penalties for CFCs during martial law?

During the period of martial law in Ukraine, penalties for violations of CFC rules have been suspended. However, this does not exempt entrepreneurs from submitting reports. Once the established period (the duration of martial law plus six months) ends, the imposition of penalties will recommence.

 

Can penalties for CFCs be avoided if the company was inactive during the reporting period?

The inactivity of a controlled foreign company may exempt its owner from paying taxes. However, the submission of notifications and reports is still mandatory. To avoid a penalty, submit a zero report for the period when the company was inactive.

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