Challenging Penalties for CFCs

A controlled foreign company (CFC) is a legal entity registered abroad and owned (controlled) by a resident of Ukraine.

The resident controlling the CFC is responsible to regulatory authorities, and failure to meet these obligations can result in severe penalties (up to 1000 minimum living wages). If the violations are serious enough, the controlling individuals may face administrative or criminal liability (for example, forced collection of funds or assets, account freezes, or activity bans).

On March 15, 2022, the Ukrainian Parliament passed Law No. 2120-IX, which suspends the enforcement of regulatory authority decisions from February 24, 2022, for six months following the cessation or cancellation of martial law in Ukraine.

• As a result, controlling persons have a temporary delay in penalty enforcement. However, the reporting obligation remains! Failure to submit reports, delays, or discrepancies can lead to large penalties in the future.

When CFC Penalties Apply

It should be noted that CFC provisions have been in effect in Ukraine since 2022. According to regulatory acts (Law No. 466-IX) and the Tax Code of Ukraine (Article 39-2), Ukrainian residents who are controlling persons of CFCs must fulfill certain obligations.

The controlling person must:

1. Notify Ukrainian tax authorities of any changes (acquisition or loss of ownership shares, etc.) in the foreign company within 60 days of such events.
2. Prepare a financial report on the activities and profits of the foreign company for Ukrainian tax authorities. Typically, the CFC report is submitted along with the tax declaration or annual property and income statement.
3. Pay taxes on undistributed profits if the total income of all CFCs controlled by one individual exceeds 2 million euros.

CFC penalties range from 1 to 1000 minimum living wages and apply in the following cases:

1. Failure to submit a notification of the existence of a controlled foreign company.
2. Late submission of the CFC profit report.
3. Violation of documentation requirements.
4. Non-payment of taxes on CFC income.
5. Incomplete disclosure of information about the company’s owners and structure.

It is also important to note that financial penalties may arise if tax authority requests are ignored. These requests require truthful and detailed responses from the controlling person within thirty days of receipt. They may relate to identified discrepancies in reports or non-compliance with deadlines and documentation requirements, as well as data obtained from tax authorities of another jurisdiction.

• Paying penalties does not exempt the taxpayer from the obligation to submit reports and supporting documents!

If there are errors in the CFC report (for example, underreporting tax liabilities), penalties will not apply, provided the controlling person corrects the errors independently.

Failure to Submit a Notification of the Existence of a Controlled Foreign Company

A penalty of 300 minimum living wages is imposed on the controlling person for failure to submit a notification of the existence of a CFC. These financial sanctions apply for each CFC under their control.

Late Submission of the Cfc Profit Report

Submitting the CFC report is an important process that requires compliance with deadlines and reporting rules, along with accompanying documentation.

For failure to meet reporting obligations, the controlling person faces the following penalties:

• Late submission of the report: ranging from 1 to 50 minimum living wages for each calendar day of non-submission.
• Failure to submit a report: 100 minimum living wages.

The reporting period is typically the calendar year, but other timeframes may be used throughout the year.

Violation of Documentation Requirements

If the CFC report does not contain all the necessary information, it is considered as concealing data about the controlled companies. In this case, financial penalties can amount to 3% of the CFC’s income or 25% of the adjusted CFC profit (up to a maximum of 1000 minimum living wages).

Failure to submit transfer pricing documentation or providing incomplete copies of CFC primary documents upon request from the controlling authority is also subject to a fine of 3% of the CFC income for which the documentation was not provided (up to a maximum of 1000 minimum living wages).

Non-payment of Tax on CFC Income

The controlling person pays personal income tax at a rate of 18%, plus a 1.5% military levy. The total tax rate is 19.5%, and the taxable object is the portion of the CFC’s adjusted profit that corresponds to the controlling person’s share.

Failure to pay tax on CFC income results in financial liability for the controlling person according to paragraph 126.1 of Article 126 of the Tax Code of Ukraine (TCU).

Incomplete Disclosure of Information About Owners and Company Structure

A fine of 300 minimum living wages is imposed on the controlling person if they fail to inform the regulatory authorities about the following information concerning the owners and structure of the foreign company:

• Changes in the ownership share in the CFC;
• Actual control over the CFC;
• Creation of entities without legal personality status.

This information must be submitted by the controlling person within 60 calendar days from the event.

Why It Is Important to Challenge CFC Penalties in a Timely Manner

The military aggression against Ukraine has caused many taxpayers to be unable to submit notifications or reports for controlled foreign companies in a timely manner.

Transitional provisions of the Tax Code of Ukraine have waived penalties for the 2022-2023 reporting years, and controlling persons during this period were exempt from administrative and criminal liability for violations related to CFC rules.

Since 2024, the campaign for submitting reports for controlled foreign companies for the 2022 and 2023 tax years has resumed. Now, controlling persons face large fines for non-compliance. Despite the temporary suspension of penalties, it is not advisable to rely on amnesty after martial law ends.

• Remember, the suspension of financial sanctions does not exempt you from paying them!

If a resident-controlling person believes that the tax authority has made a decision contrary to the law (exceeding its powers), they have the right to file a complaint with a higher-level regulatory authority for a review of this decision.

The procedure for challenging decisions made by tax authorities is outlined in Article 56 of the Tax Code of Ukraine. A complaint must be filed within ten calendar days of receiving the tax notification or any other contested decision from the regulatory authority.

Risks of Self-Challenging

If you believe that the CFC penalty was imposed unlawfully, you can take the following steps to protect your rights:

1. Carefully review the grounds for financial sanctions.
2. Understand exactly why the penalty was imposed.
3. Gather evidence that supports your position regarding the regulatory authority’s decision (e.g., witness statements, documents, photos, etc.).
4. Submit a complaint to the tax service regarding the review of the decision. You need to prepare a written complaint detailing the reasons why you consider the penalty unlawful, and provide evidence of your position. During the complaint review, the penalty does not need to be paid, and no interest will be charged. A key point: the complaint should be submitted to the tax office that made the contested decision. Submitting it directly to a higher authority may lead to the complaint being returned without consideration.
5. If the complaint is not upheld by the tax service, you have the right to file a claim with the arbitration court, but protection there requires an in-depth analysis of CFC legislation and legal precedents.

It is important to adhere to the specifics and all the requirements of the legislation and procedural rules when challenging the penalty to effectively protect your rights.

• Unfortunately, self-challenging CFC tax penalties is fraught with difficulties, as, without specialized knowledge and experience, the process takes much longer and does not guarantee success.

To properly prepare and submit a complaint, it is better to consult competent specialists. A qualified lawyer will help assess the legality of the penalty, explain your rights, and correctly formulate the claims.

Professional assistance is the right choice for protecting your interests and minimizing potential mistakes that could reduce your chances of a successful resolution of the issue.

When to Challenge CFC Penalties

Penalties for controlled foreign companies can be challenged through administrative or judicial procedures, for which it is necessary to file an appeal or complaint against the decision of the supervisory authority.

• Recall that penalties for all violations regarding controlled foreign companies that occurred since 2022 will be applied six months after the end of martial law in the country.

If you have received a notification with the penalty amount but disagree with the decision of the supervisory authority, you have the right to challenge the tax penalties for the CFC either administratively or in court.

You should challenge CFC penalties in the following cases:

• Incorrect calculation;
• Presence of mitigating circumstances;
• Violation of procedural norms;
• Exceeding the authority of tax authorities;
• Violation of the statute of limitations.

Let’s look at each case in more detail.

Incorrect Calculation

A penalty imposed based on erroneous (false) data or in violation of current legislation can be challenged.

Mitigating Circumstances

If you have documented circumstances that prove your innocence in committing the offense, you have the right to request a review of the financial sanctions imposed by the tax authority.

Violation of Procedural Norms

If the procedures for imposing the penalty were violated by the administrative authority or the court (such as failure to follow procedural regulations), it is quite possible to challenge the decision.

Exceeding the Authority of Tax Authorities

If the imposition of the penalty violates your rights and freedoms (such as discrimination or wrongful restriction of rights), you can file a complaint for its cancellation.

Violation of the Statute of Limitations

If you believe that the statute of limitations was violated according to the tax authority’s decision (according to Article 102 of the Tax Code of Ukraine), you have the right to request a case review and re-examination.

Our Services for Challenging CFC Penalties

Lawrange works to minimize the risks of your complaint being rejected, saving you time and resources. We help quickly resolve the issue and challenge wrongful decisions regarding controlled foreign companies in the tax service or in court.

Our services include:

• Consultation on challenging penalties;
• Analysis of the legality of financial sanctions imposed on CFCs;
• Preparation and submission of complaints;
• Representation of clients’ interests in tax authorities and courts.

Additionally, our services include advising the client at all stages of the process, assisting with the payment of state duties, gathering evidence, and more.

Consultation on Challenging Penalties

Preliminary consultation is necessary to determine if the client has valid grounds to challenge CFC penalties. Often, due to incorrect interpretation of legislation or errors in calculating tax obligations, situations arise where the client believes the imposition of penalties is unjustified.

However, there are other violations that indeed lead to unjust decisions. For example, failure to comply with the procedure for conducting a tax audit, incorrect application of legal requirements, or the use of unreliable information when making a decision.

Analysis of the Legality of Imposed Penalties

Successful contesting of tax penalties for CFCs requires a legal analysis of the decision, reviewing the client’s documents, and gathering evidence. This is necessary to ensure all prerequisites are in place for drafting the complaint. Next, a legal position is prepared and agreed upon with the client.

Preparation and Submission of Complaints

After gathering evidence that proves the penalty was imposed unlawfully, a complaint is drafted and submitted. This document must consider legislative requirements and include all the necessary arguments from the client.

To properly draft such a complaint, it is necessary to:

• Clearly formulate the essence of the claim;
• Specify the violations by the tax inspection (for example, the laws that were violated);
• Attach copies of supporting documents.

The complaint should also state the demands (for example, to cancel the penalty or conduct a re-examination).

Representation of Interests in Tax Authorities and Courts

If the higher tax authority refuses to cancel or revise the decision, a lawsuit should be prepared to challenge the CFC penalties in court. This procedure has certain specifics that must be followed:

1. Pre-trial dispute resolution. For this, lawyers represent the client’s interests in tax authorities at all levels.
2. Preparation and submission of the lawsuit. The lawsuit is filed with the arbitration court at the location of the tax authority that issued the decision.
3. Representation of the client’s interests during court hearings, as well as preparation and submission of statements on various procedural matters.

The deadline for contesting a tax authority’s decision in court is approximately three months.

Why Choose Lawrange

Lawrange is a team of professional lawyers. We advise on CFCs and are well-acquainted with all the nuances that affect the tax situation of the controlling party in Ukraine.

Cooperation with Lawrange will help you win disputes regarding CFC penalties and effectively resolve other legal issues concerning tax decisions on foreign companies.

Lawrange is, above all:

• Knowledge of the legislation and expertise in tax law;
• An individual approach to each client and thorough analysis of the situation;
• Professionalism and reliability;
• Confidentiality and protection of clients’ interests.

We provide professional legal assistance in solving any legal issues.

Expertise in Tax Law

Our lawyers know how to correctly challenge the unlawfulness of decisions on controlled foreign companies because they have a deep understanding of the specifics of Ukrainian legal fields and the legislation of other jurisdictions.

Individual Approach

We take a meticulous approach to resolving each specific issue to ensure the protection of your foreign business and assets from any risks.

Professionalism and Reliability

We have many years of successful legal practice and rich experience in resolving various issues related to CFCs.

Confidentiality and Protection of Interests

All information regarding the conduct of your business will never be passed to third parties. Our lawyers will help you with the documentation of your controlled foreign company and calculate the tax amount since the controller of a foreign company is required to follow the rules for filing and reporting as well as pay tax on the foreign company’s profits.

We will also help you check your CFC for any possible conditions for removing its fiscal obligations within our country, allowing the controlled foreign company to increase its profitability.

Conclusions

Since penalties for failure to comply with CFC obligations have not been canceled, but only postponed, all controlling parties need to pay special attention to the legislative requirements. Given that this area is still evolving, changes and additions frequently appear, which should be monitored and applied.

It is expected that in the coming years, the tax service and controlling parties of CFCs will become familiar with the new rules. Nobody wants to incur large financial penalties due to ignorance of the law.

The best way to protect yourself from penalties in the future is to seek consultation and professional help from experienced lawyers at Lawrange.

FAQ

CHALLENGING PENALTIES FOR CFCS