From 01 January 2021, the issue of reporting and taxation of consolidated profits will become relevant for all Ukrainian citizens and Ukrainian companies that have shares in foreign companies, as defined in the Tax Code of Ukraine.

What is a CFC (controlled foreign company)?

CFC is a company registered in a foreign state or territory that is recognized as such and is under the control of a resident of Ukraine (a legal entity, or an individual living in Ukraine for more than 183 calendar days of 365). The CFC category includes not only legal entities but also partnerships, trusts, foundations and charitable organizations, i.e. formations without legal entity status.

In this case, a foreign company shall be deemed to be controlled if a resident of Ukraine:

– owns a share in a foreign company in the amount of 50% or more, or

– together with other residents of Ukraine, owns a share in a foreign company, which is at least 25% (during the transitional period of application of the Law 2021-2022), later – at least 10%, provided that several residents of Ukraine own shares in a foreign legal entity, the amount of which is 50 percent or more in aggregate, or

– separately or jointly with other residents – related parties, exercises effective control over a foreign company.

If these conditions are not observed, the company will not be recognized as controlled, and there will be no consequences for such a shareholder (member) in the form of reporting and special taxation.

What are the consequences of owning a CFC?

If you are the owner of a CFC, the following obligations arise: to file reports and, under certain conditions, pay taxes.

Each CFC owner shall annually file a CFC report, as well as notify the tax service of any change in the status of the controller of a foreign structure (acquisition of a share in a foreign legal entity or effective control, alienation of a share or termination of effective control, creation, acquisition, liquidation or alienation of property rights in the assets of entities without legal entity status).

The CFC report shall contain data on the company: country of incorporation, ownership structure, information on income, employees and movement of funds.

The report based on the results of 2021 shall be filed for the first time in 2022.

The obligation to pay consolidated taxes on CFC’s profits in Ukraine arises excluding any of the following exceptions:

  1. The CFC was established in a country with which Ukraine concluded an agreement on the avoidance of double taxation, exchange of tax information and one of the following conditions was fulfilled:

– The CFC shall actually pay income tax at an effective rate that shall be no less than a base rate (18%) or at a rate of at least 13%, or

– more than 50% of CFC’s income shall be active.

  1. The total income of all CFCs of one controlling person shall not exceed EUR 2 million.
  2. CFC shall be a public company listed on a recognized exchange;
  3. CFC shall be an organization that, in accordance with the legislation of the relevant foreign jurisdiction, carries out charitable activities and does not allocate income in favor of its founders (members).

Nevertheless, if a foreign company does not meet the above criteria, and a resident individual will be a controller as per the criteria, it will be necessary to pay tax on the CFC’s unallocated profit.

Penalties are established for failure to file the report or late filing of a CFC report, failure to notify the acquisition of a share in a foreign company or the establishment of effective control (applied from 2023).

For details about opening a company abroad, filing reports and disputes with tax services, you can contact the Zilver Law Firm specialists: +380501409560, info@zilver.com.ua.

 

You may get more infromation about:

How to establish the Ukrainian company? 

Dividends to the foreign sahreholder.

Supply contract template

Filing information about beneficial owner of the Ukrainian entity. 

Checklist: IT contract

 

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