Submission of a notice about controlled foreign companies (CFC) is an important step that must be taken to comply with Ukrainian tax legislation. CFC belong to a certain group of enterprises with unique tax requirements within the framework of the tax system.

 

The CIC notice contains information about the facts of ownership and management of foreign legal companies or about ownership rights in addition to other relevant information. In this procedure, it is extremely important to complete the notification and submit the necessary documents to the relevant tax inspectorate.

 

 

What is CFC?

A corporation controlled by a foreign investor or a foreign company is known as a controlled foreign company. When a foreign investor buys a controlling stake or exercises control over the management of a firm in another country, it can be considered as part of foreign direct investment.

 

CFC is a type of global entrepreneurship in which a foreign investor participates in the creation or purchase of a firm in another country to expand its market presence or gain access to new resources or technologies.

 

Depending on the country in which the business is conducted, a controlled foreign company can have a number of legal structures. A company must comply with all laws and regulations established by the country in which it is incorporated, as well as any regulations developed specifically for foreign investors in that country.

 

Ukraine supported this global initiative, which was enshrined in Law No. 466-IX, which entered into force on May 23, 2020. This caused controversy, especially regarding the very strict provisions of the law on sanctions. The law also strengthens the criteria for permanent establishments and adds additional transfer pricing reporting.

 

So, under what circumstances do the Ukrainian tax authorities consider that you are related to a foreign corporation that is under foreign control?

 

According to the legislation of Ukraine, a controlled foreign company is any legal entity, including in certain cases unincorporated entities (companies, trusts and foundations), which is registered outside of Ukraine and managed by a citizen or tax resident of Ukraine.

 

 

How does the tax office find out about CFC?

A controlled foreign company can be detected by the Tax Service of Ukraine using various sources of information and methods of data collection. The Tax Service of Ukraine has access to information about CFC in the following ways:

  • Statements of taxpayers

Tax returns, which include detailed information about the taxpayer’s activities and financial transactions, must be filed by businesses and independent contractors. This information may contain information about foreign corporations that are under foreign control.

 

  • Reports on international agreements

Banks, financial institutions and other persons who are required by law to provide such information can notify the tax service about cross-border transactions. These reports may contain detailed information about controlled foreign enterprises related to international financial activities.

 

  • Exchange of information with other countries

International agreements on the exchange of information in tax matters, such as the Agreement on Mutual Administrative Assistance in Tax Matters, include Ukraine as a party. With the help of such mechanisms, foreign tax authorities can provide information on CFC to the Ukrainian tax authority.

 

  • Data and risk analysis

Using modern methods and technologies, the tax inspectorate can conduct data and risk analysis to identify possible cases of tax evasion or inaccurate tax declarations. Part of this can be the inspection of controlled foreign corporations, especially if there is concern that the controlled foreign company is being used for tax fraud.

 

 

Who do CFC apply to?

The controlling person (controller) of the CFC is an individual resident of Ukraine or a legal entity resident of Ukraine who:

  • owns a share in a foreign legal entity in the amount of more than 50 percent, or
  • owns a share in a foreign legal entity in the amount of more than 10 percent, provided that several natural persons-residents of Ukraine and/or legal entities-residents of Ukraine own shares in a foreign legal entity, the total amount of which is 50 percent or more, or
  • individually or together with other residents of Ukraine-related persons exercises actual control over a foreign legal entity.

 

You are required to submit a notification of the existence of a controlled foreign company in accordance with the requirements of the tax legislation of Ukraine, if you fall under the criteria that define you as a controlling person of a CFC.

 

 

Tax residency of Ukraine

The term “tax residency” in Ukraine refers to the tax status of individuals and legal entities that must comply with the tax legislation of Ukraine and pay taxes in Ukraine.

 

A person is considered a tax resident of Ukraine if at least one of the following conditions is met:

  • Stay in Ukraine for a total of more than 183 days per year, including breaks.
  • The presence of housing provided to a person in accordance with the legislation of Ukraine, which means the presence of a permanent place of residence on the territory of Ukraine.
  • The person has social and economic ties to Ukraine and calls Ukraine his main place of residence, which indicates that he spends most of his time here.

 

If a legal entity is registered in Ukraine in accordance with the legislation of Ukraine or has its main place of business there, it is considered a tax resident of Ukraine.

 

Tax requirements in Ukraine, such as income tax, personal income tax, VAT, depend on tax residency. It is extremely important to note that tax laws and residency requirements can change, so you can contact a Lawrange tax consultant to always be up to date with new changes and requirements.

 

 

Duties in the presence of CFC

When your business is subject to the legislation of Ukraine on CFC, the State Tax Service imposes special requirements on you.

 

You must file a notice of controlled foreign company status as one of your initial actions. We will look at this in more detail later, but for now we will focus on duties.

 

Financial statements of your business activities and income must be prepared. You may need to submit audited tax returns.

 

Your business must pay taxes in Ukraine if it does not meet the requirements for tax exemption. Nevertheless, CFC may be exempted from income tax in the following two cases:

  1. There is an agreement on the prohibition of double taxation between Ukraine and the country in which your business is registered (for example, Estonia, USA, Great Britain, Georgia, Czech Republic or Cyprus), and one of the following criteria is met:
  • The effective rate of income tax, which is actually paid by the CFC, is equal to the basic rate of income tax for firms in Ukraine or is less than such rate by no more than 5%.
  • The percentage of the total passive income of the business (including royalties, dividends, interest on deposits, etc.) is not more than 50%.
  1. Upon fulfillment of any of the following requirements, the adjusted profit of the controlled foreign company shall be excluded from the total taxable income of the controlling entity:
  • After the end of the reporting period, the total income from all your CFCs does not exceed the equivalent of 2 million euros.
  • The business you own is open to the public and shares are traded in it. The Cabinet of Ministers establishes the list of exchanges and requirements for shares.
  • The business engages in charity in accordance with the requirements of local law and does not distribute profits among its members or founders.

 

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So, in particular, if your business is active (including e-commerce), based in a recognized jurisdiction such as the US, UK, Poland or another, but its annual revenue is less than €2 million, you may not pay taxes.

 

 

What is a CFC notification?

A corporation must submit a CFC notice to the Ukrainian tax authorities if it is determined to be a controlled foreign company in accordance with established legal criteria.

 

You are reporting if any of the following apply to you and your actions in 2022 and 2023:

  • registered or started a foreign business, including formation without the status of a legal entity;
  • received ownership rights to part of the assets, revenue or income of a non-incorporated organization (for example, through a partnership, foundation or trust);
  • liquidated a foreign corporation;
  • sold or donated a share in a foreign corporation, as well as bought or received it as a gift (including indirectly through a nominal, authorized or other representative);
  • ceased to be a beneficiary of a foreign company;
  • got the opportunity to manage or, on the contrary, lost control over a foreign company.

 

A separate notification for each CFC is sent electronically using the taxpayer’s online office to the tax authority at the place of registration. Individuals should use Form ID F1308001.

 

 

What is the official name of the CFC notification?

Notification of acquisition (beginning of actual control) or disposal of a share (termination of actual control) by a resident 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

 

 

When is it necessary to submit a notification about CFC?

According to the general rule established by the Ukrainian tax legislation, the notification is submitted within 60 calendar days from the moment of acquisition/disposal of a share in a foreign company or implementation of other actions described above by the controller in relation to KVK.

 

 

What document regulates the procedure for submitting a notice of CFC?

The Tax Code and other laws, approved by the Ministry of Finance of Ukraine, regulate the process of submitting a notice of CIC in Ukraine.

 

The main legal basis for laws regulating taxation and accounting of controlled foreign companies as of January 1, 2022 is the Tax Code of Ukraine. It includes norms concerning the terms and obligations of residents of Ukraine regarding the notification of the CFC.

 

The Ministry of Finance of Ukraine establishes a specific method and features of submitting a report on a controlled foreign company. The Ministry of Finance may issue additional instructions and proposals to make the rules and practices related to the notification of CFC more clear.

 

Therefore, it is recommended to familiarize yourself with the relevant sections of the Tax Code of Ukraine and additional acts of the Ministry of Finance of Ukraine when submitting a notice of CFC in order to be aware of the requirements and processes related to this obligation

 

 

How to submit notices regarding CFC?

In order to submit a notice of CFC in Ukraine, the following procedures must be performed:

  1. Get access to the taxpayer’s personal account. To do this, you need to go through identification on the official website of the Tax Service of Ukraine. Personal Qualified Electronic Signature, BankID, MobileID, Diya.Signature or other form of ID are all options.
  2. Select the desired form of notification after entering your personal account in the section on taxes and accounting for controlled foreign companies.
  3. Fill out the CFC notification form with the necessary data and details about your business and the controlled foreign company. Make sure each field is filled in accurately and completely.
  4. After filling out the notification form, check it for errors and inaccuracies. Make sure the information provided is correct and compliant with IRS regulations.
  5. Use the personal account of the taxpayer to confirm and send a notification about KIK. You may need to click the Submit button or similar to complete the notification process.

 

It is important to note that reporting on CFC in Ukraine is submitted only in electronic form. The message will not be accepted on paper. Therefore, follow the instructions carefully and complete and submit the notification through the taxpayer’s personal account.

 

 

What is indicated in the notification about CFC?

The following details must be specified in the notification about the CFC in Ukraine:

  • Information identifying the taxpayer: the taxpayer’s full name, individual tax number or other identification document, as well as any additional information that may be required.

 

  • Identification information: The notification must include the name of the foreign legal entity, the country in which it was established, and any other information that would allow the identification of the legal entity.

 

  • Status: The notice must state whether the controlled foreign entity is a company, trust, foundation, partnership, or other unincorporated entity.

 

  • Ownership: It is necessary to specify the type of control (direct or indirect) over the CFC, the percentage of ownership, the start and/or end date of control over the foreign company.

 

 

What is the fine for failure to submit a notice of CFC?

According to the above information, fines in Ukraine for failure to submit a notice of CFC have the following features:

Currently, a fine of 300 subsistence minimums is provided for an able-bodied citizen, which is equivalent to UAN 2,684 on January 1, 2023. Thus, in 2023, a fine of UAN 805,200 will be imposed for each unsubmitted notification to the CFC.

 

However, it is possible to avoid the fee if the message is not sent on time. Currently, the legislation provides for a fine only for complete failure to submit a notification; it does not provide for late filing. There will be no fine if the notification is sent before the tax authority knows about the CFC from another source.

 

However, a fine will apply if the tax authorities become aware of your company before you file a notice.

 

Bill No. 8137 states that fines will be imposed for each day of delay in notification. The minimum living wage will be applied for each day of delay, but not more than 25 sizes. Until the renewal of the subsistence minimum, the maximum fine for late filing is UAN 67,100.

 

Also, under the terms of the draft law No. 8137, fines for failure to submit a notification will be reduced from 300 to 50 subsistence minimums.

 

 

Lawrange professionals will help you fill out and send the CFC notice within the stipulated time

The lawyers of Lawrange will help you fill out and deliver the CFC notice within the prescribed time limits. Our specialists are qualified due to their familiarity with tax legislation and CFC notification processes.

 

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When you contact the specialists of Lawrange, you can get advice, clarify the conditions and features of filling out the notice, they can help you collect the necessary documents and information. Our lawyers ensure that filing deadlines are met and that notices are sent on schedule and in the appropriate format.

 

It is extremely important to make it clear that Lawrange can provide assistance in various scenarios. It is recommended that you contact us directly to learn more about how we can assist you in your specific circumstances.

 

 

Conclusion

In Ukraine, in order to report a CFC, you need to submit official documents to the tax authorities. Using your own taxpayer account, you fill out the electronic form. The notice indicates information about the taxpayer, the foreign structure, its status, as well as who controls it. Notification fines can be avoided by submitting such notification in a timely manner. Contact our lawyers for help if you have any questions.

 

 

FAQ

Who does not submit a notice of CFC?

Some groups of people in Ukraine do not report a controlled foreign company:

  • Citizens of Ukraine who do not have control over foreign companies or ownership rights to part of their assets, income or profits.
  • Legal entities and organizations without formation of a legal entity that do not belong to the CFC.
  • Residents who have shares in foreign organizations, but meet separately established conditions, which exclude the need for them to submit notifications.

 

What documents should be attached to the notification of CFC?

The list of documents to be attached is not included in the notice of CFC. But in the future, it will be necessary to submit a report with the addition of the company’s financial statements to the CFC.

The report is submitted together with:

  • Annual declaration on property status and income (if the controller is a natural person; the submission deadline is May 1 of the year following the reporting year);
  • Tax declaration for the relevant year (if the controller is a legal entity; the tax declaration must be submitted by March 1 of the year following the reporting year).

 

Where to submit a notice about CFC?

The notification of the CFC must be sent electronically to the tax authority at the place of registration of the CFC controller.

 

 

 

 

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