With the recent legislative changes in Ukraine, controlled foreign companies (CFCs) have come under increased scrutiny from tax authorities. For Ukrainian tax residents who control foreign companies, filing notifications and reports for CFCs has become mandatory and requires a thorough understanding of the legal provisions. This article provides an overview of the key requirements and regulations related to filing notifications and reports for CFCs, with references to the relevant legal acts.
1. Obligation to File CFC Notifications
Ukrainian tax residents are required to file notifications about their controlled foreign companies in cases where they are direct or indirect owners or controllers of such companies. According to Article 39-2.1.1 of the Tax Code of Ukraine (TCU), a company is considered a CFC if a Ukrainian resident owns more than 50% of the shares or holds more than 10% of the shares, provided that several Ukrainian residents collectively own more than 50% of the company.
2. Deadlines for Filing Notifications
As stated in Article 39-2.2.1 of the TCU, a notification about the acquisition of a stake in a company that becomes controlled must be submitted to the tax authorities of Ukraine within 60 days from the occurrence of such circumstances. This may pertain to the acquisition or increase of a stake in an existing foreign company that results in a change in its status.
3. CFC Reporting: What You Need to Know
The annual property and income declaration includes CFC reporting, which Ukrainian tax residents are required to submit annually. According to Article 39-2.5 of the TCU, the report must contain information about the income received from the CFC, as well as details about taxes paid abroad. The tax base is determined based on the financial statements of the CFC, prepared in accordance with international financial reporting standards (IFRS) or other recognized standards.
4. Taxation of Income from CFCs
Under Article 39-2.5.4 of the TCU, income received from a CFC is subject to taxation in Ukraine at a rate of 18%. If the income has already been taxed abroad, the resident may utilize the tax credit mechanism under international double taxation avoidance agreements.
5. Preferential Conditions and Exemptions
The Tax Code of Ukraine provides certain benefits and exemptions for individuals who own CFCs. According to Article 39-2.4 of the TCU, individuals may be exempt from the obligation to file reports if the CFC is located in a country with which Ukraine has a valid double taxation avoidance agreement, or if the total income of the CFC does not exceed 2 million euros per year.
6. Liability for Failure to File Reports
Failure to fulfill the obligations to file notifications or reports for CFCs can result in significant financial penalties. In accordance with Article 120-2 of the TCU, the penalty for failure to submit or late submission of a CFC notification can reach up to 500 times the minimum wage, which can substantially impact the taxpayer’s financial situation.
It is worth noting that on June 18, 2024, the President of Ukraine signed Law No. 3706-IX, which provides for the temporary suspension of penalties for failure to submit reports and notifications regarding CFCs, effective from July 1, 2024.
Conclusion
Compliance with the requirements for filing notifications and reports for CFCs is a critical aspect of Ukrainian tax law for residents who have foreign assets. Avoiding penalties and ensuring proper compliance requires a careful approach and, in many cases, professional assistance from tax consultants or legal advisors.
If you have any questions regarding CFC reporting or need assistance with its preparation, our law firm is ready to provide expert support and consultations.