Tax Disputes on CFC

According to the Law of Ukraine (No. 466-IX) and Article of the Tax Code of Ukraine (No. 39-2), which came into effect on January 1, 2022, the concept of “Controlled Foreign Company” (CFC) was officially introduced in our country.

Since martial law in Ukraine does not cancel the requirements for tax regulation, controlled foreign companies are obliged to submit the required reports. Failure to comply with this condition may lead to serious fines, although the Verkhovna Rada of Ukraine decided in May 2024 to temporarily suspend liability for such violations.

However, it is a mistake to think that due to the Verkhovna Rada’s decision to suspend CFC reporting, this issue can be forgotten. Fines for non-compliance with CFC legislation will be applied six months after the end of martial law, and this applies to all violations that occurred from February 24, 2022.

What is a CFC

A Controlled Foreign Company (CFC) is any legal entity controlled by a resident of Ukraine (individual or legal entity).

• All commercial and non-commercial enterprises are subject to tax control regardless of the jurisdiction of the owner’s country of residence.

CFC rules apply to both medium and large businesses: trusts, partnerships, foundations, and other organizations, as well as individual entrepreneurs (for example, those trading on global marketplaces).

The controlling person of a CFC can be an individual or legal entity-resident of Ukraine, who is a direct or indirect owner of this foreign company.

To qualify as a controlling person, at least one of the following criteria must be met:

1. A share in the company’s capital of 50% or more.
2. Ownership of 10% of the total ownership by Ukrainian residents of 50% or more.
3. Actual control of the foreign company.

A company may also be recognized as a controlled foreign company if ownership occurs through other companies, or if the CFC becomes the owner of another foreign company.

Obligations of the Controlling Person of a CFC

According to the adopted article of the Tax Code of Ukraine, the controlling person is obliged to:

1. Prepare and submit a CFC report to the tax authority simultaneously with the annual tax declaration for the corresponding calendar year.
2. Prepare and attach certified copies of the CFC’s financial statements to the report, confirming the amount of its profit for the reporting (tax) year.
3. Pay taxes on the undistributed profits of the CFC.
4. Notify the tax authority within 60 days about the following facts:

• Direct or indirect acquisition of a share in a foreign company;
• Creation or acquisition of property rights to a share in assets;
• Liquidation or disposal of property rights to a share in assets and other facts.

Currently, the legislation provides two forms for submitting a CFC report. This is due to the fact that different jurisdictions have different deadlines for preparing financial reports.

1. Full Report: Used for foreign companies whose financial statements are ready by the general submission deadline.
2. Simplified Report: Used when the CFC’s financial statements are not ready by the general submission deadline.

A simplified CFC report typically contains general information about the company (name, address, country of registration, ownership structure, tax number, etc.).

The full report includes additional information about the CFC, such as:

• The controlling person’s share size;
• Ownership structure of the share;
• Information about income;
• Calculation of adjusted profits;
• Information about grounds for tax exemption of profits;
• Amount of dividends;
• Data on cash movements and some other details.

The full CFC report is submitted along with the Declaration of Property Status and Income (or Profit Tax Declaration) depending on who the controller is. It also includes appendices, such as:

• Certified copies of the CFC’s financial statements;
• A statement of waiver of exemption from profit tax, submitted in any form if the controlling person voluntarily waives such exemption;
• Adjustment appendices (if necessary);
• Securities appendices (if necessary), and some other documents.

Fixed taxes on the CFC’s profits are not payable if:

• The total profit of the foreign company does not exceed two million euros;
• The company is registered in a country with which Ukraine has a double taxation avoidance or tax information exchange agreement;
• It is a public company with shares listed on well-known stock exchanges;
• The company is a charitable organization.

However, annual reporting is still required.

Disputes with the Tax Authority on CFC: Reasons for Occurrence

Despite the temporary delay in penalty sanctions (due to martial law in the country), the obligation to report remains. Failure to submit reports on time may lead to unpleasant consequences in the future. The tax authority continues to monitor compliance with legislation, so any discrepancies may result in penalties.

If violations are serious enough, the owner may be held accountable (administratively or criminally), which could involve forced recovery of funds and material assets, as well as the freezing of accounts and a ban on activities within the jurisdiction.

The most common situations that lead to tax disputes are related to the disregard of supervisory authorities’ requests. Such requests arise under the following circumstances, which require an honest and prompt response from the controlling person:

• When discrepancies in reporting are found;
• When information is received from tax authorities of another jurisdiction;
• When large transactions are identified;
• When discrepancies between the CFC’s income and expenses are detected;
• When deadlines and formal requirements for documentation and reporting are not met.

The tax authority may also require information on the conduct and results of scheduled inspections of the CFC’s activities.

Submitting a detailed response to a supervisory authority’s request should not exceed thirty days from the date of receipt. The response must be provided in writing using the template approved by the regulator.

Let’s take a closer look at the main reasons for tax disputes.

Violation of CFC Legislation

According to Ukrainian legislation on controlled foreign companies, any non-compliance with it results in penalties that can reach up to 1,000 minimum living wages (MLW). This includes failure to submit a CFC report or submitting it late, failure to notify about acquiring a share in a foreign company or establishing actual control, and much more.

Paying such financial sanctions does not exempt the controlling person from the obligation to submit the report and supporting documents to the controlling authority. It should also be noted that the amount of the minimum living wage increases annually, so the penalties will also rise.

Errors in Tax Calculations

Arithmetic errors in the report when calculating the amount of profit may lead to incorrect tax obligations being assessed.

Inaccurate Information on Ownership and Control

Controlling persons often incorrectly indicate the type of control in the CFC report and forget to include information about existing controlled foreign companies, which affects the accuracy and reliability of the submitted documentation.

In most cases, CFC control is formal-legal. However, there may be cases of specific organizational structures or indirect ownership of a company, where signs of actual management appear. For example, holding companies with a complex ownership structure.

Lack of Supporting Documents

The absence of supporting documents (e.g., copies of primary documents related to the controlled foreign company) or submitting them incompletely may lead to additional requests from the tax service, and failure to provide them may result in penalties.

Transfer Pricing Issues

Transfer pricing in Ukraine is regulated by the Tax Code. This includes the prices at which legal entities of the same international corporation enter into contracts with each other.

Failure of the controlling person to submit the full documentation on transfer pricing for the CFC will also lead to additional requests from the controlling authority and possible penalties.

Why Is It Important to Seek Help on Time?

The area of Controlled Foreign Companies (CFC) is quite complex, although it might seem straightforward at first glance. The legislation on Controlled Foreign Companies contains a number of reference norms, transitional provisions, exceptions, and other aspects that should not be neglected.

Key points:

1. For all controlling persons, the reporting obligations for CFCs remain in place, despite the postponement of fines. It is essential to adhere to the established deadlines for submission to avoid future problems.
2. Fines are only postponed, not canceled (for the period of martial law and six months after its end). Do not expect amnesty.
3. The tax authorities are actively monitoring and collecting data on violators. Moreover, there is automatic information exchange through the Common Reporting Standard (CRS) system, which means that the Ukrainian tax authorities receive all information about the foreign assets of Ukrainians (including CFCs). This enables them to impose fines for violations of reporting requirements.
4. If a shortened report on the controlled foreign company was submitted, a full report with appendices must be prepared and sent.

To prevent potential negative consequences and protect yourself from hefty fines, it is better to contact qualified specialists in time who can explain the nuances related to CFC regulation, taxation, and reporting, as well as help resolve any issues.

Services Provided

Everyone understands that the bureaucratic work associated with taxes and documentation is quite a serious issue that requires time and effort. However, there is no guarantee that you won’t have to answer for mistakes made in reports. To eliminate the risk of such situations, you can seek help from professionals.

Let’s take a closer look at some of the services provided.

Legal Audit of Controlled Foreign Company Documentation

The preparation and submission of CFC reports often cause difficulties. If you need help with preparing reporting documentation, the Lawrange team can take on these responsibilities. We will conduct a legal audit of the documentation, prepare, and submit the CFC reports to the tax authorities in accordance with the requirements of the law.

Preparation of objections to tax audit acts

Objections to tax audit acts are an important opportunity for the taxpayer to prove the validity of their position and challenge the results and conclusions of the supervisory authorities. Lawrange offers services in preparing such objections, which will help protect your interests.

Representation of Interests in Arbitration Courts

The procedure for representation in arbitration courts allows Lawrange specialists to effectively defend your rights and interests in order to have tax authorities’ decisions recognized as invalid.

We will prepare and formalize the necessary documentation (for example, claims, responses to claims), develop a case strategy, gather evidence, and represent you in court proceedings. We can also file an appeal or cassation complaint against court decisions.

Consulting on Minimizing Tax Risks

Our specialists provide tax consultations on CFC for residents of Ukraine who are controlling persons before supervisory authorities. We know all the nuances of CFC legislation and will offer professional consulting services on how to minimize tax risks.

Support During Tax Audits

Tax audits always represent an increased risk for businesses, as tax authorities tend to describe as many violations as possible in their audit reports. Lawrange lawyers provide comprehensive legal services to protect business rights and interests during tax audits.

Challenging Profit Tax Assessments

Lawrange helps challenge the amount of financial liabilities determined by the tax authorities if the taxpayer considers them incorrect. For this, we file a complaint for review of the decision with the tax authority of a higher level, according to the legislative norms.

How We Work with Clients on CFC Tax Disputes

The specialists at Lawrange provide legal support in CFC-related disputes. You can always rely on our experts to help resolve any issues related to Controlled Foreign Companies (CFCs).

Our legal services in CFC tax disputes include the following:

• Thorough analysis of the situation.
• Development of an effective defense strategy.
• Representation of the client’s interests before tax authorities.

If the case goes to court, we will defend your rights and interests, challenge the actions and decisions of the tax authorities, and, if necessary, file an appeal to a higher court.

We also conduct ongoing monitoring of changes in CFC legislation and will consult you if any arise.

Client Situation Analysis

First, we take an individual approach to each client and carefully analyze their problem. This includes studying and assessing the documents related to the controlled foreign company to determine the validity and legality of the tax authorities’ actions and decisions.

Defense Strategy Development

Our specialists have extensive experience in defending the rights and interests of businesses in tax-related matters. We will collect and prepare the necessary documentation (such as objections to tax audit acts) and develop an effective defense strategy for court.

Representation before Tax Authorities

During the pre-litigation settlement process, Lawrange specialists will represent your interests before tax authorities and conduct negotiations with inspecting officers.

Monitoring Legislative Changes

Since we always stay up to date with changes in Ukrainian legislation, you will be promptly informed, helping your business avoid fines or other more severe sanctions.

Legal Assistance in CFC Tax Disputes by Lawrange

Lawrange is a team of lawyers with extensive experience and deep knowledge of CFC legislation. Our specialists provide consulting services, assist with tax reporting, and resolve tax disputes related to CFC.

We offer:

1. Assistance in resolving non-standard or complex situations.
2. Full confidentiality of CFC-related activities.
3. A personalized approach and development of a tailored strategy to protect your interests.
4. Efficient resolution of tax disputes.

Lawrange professionals will also ensure timely submission of CFC reports to the tax authorities.

Take advantage of our knowledge and experience to avoid problems with supervisory authorities and significant expenses related to fines.

Conclusions

Since the reporting of controlled foreign companies (CFC) in Ukraine is a relatively new procedure, the legislation in this area is still in the process of development. Changes frequently arise, which must be monitored and followed.

It is likely that the next few years will be a transitional period. During this time, both the tax service and the controlling parties will be adapting to the new rules.

We offer an essential service for this period: keeping you informed about legislative changes and providing any assistance related to CFCs (deadlines and submission of notifications, reporting, document preparation, resolution of tax disputes, and more).

FAQ

ORDER A LEGAL SUPPORT IN DISPUTES REGARDING CFC