CFC: what things have to do foreign companies’ owners in 2023
Content of the article
The article is relevant for residents of Ukraine who plan to open, have recently opened, or have companies abroad.
In short, you may be subject to the rules of the CFC, or the rules of controlled foreign companies. That is, there is an obligation to report on the establishment of foreign companies, to submit annual reports and pay taxes, or to apply conditions for exemption from paying taxes. In case of failure to perform such actions, liability is provided, for example, a fine of UAH 744,300. for failure to submit a notification or UAH 248,100. for failure to submit reports (fines in the amount as of 2022).
Let’s analyze the rules of the CFC in more detail.
Whom tax obligations concern?
- Founders of CFC with a share of 50% or more.
- Founders of the CFC with a share of more than 25%, if you opened the company together with other residents of Ukraine, and in the total aggregate with them, you get 50%.
- Beneficial owners or those persons who have an influence on CFC. This means the right to dispose of the company’s assets or profits, access to bank accounts and operations on them, and independent conclusion of agreements on behalf of the CFC. In other words, if there is a long-term general power of attorney for such actions.
What obligations arise before the tax authorities of Ukraine?
- Notify about CFC. About the acquisition of a company or the sale of a stake in the company, about the influence on the company, or about the termination of influence (for example, the expiration of the power of attorney). The rule for CFCs registered after January 1, 2022.
It is given for 60 days for notification, the countdown starts from the day when the changes took place.
- Report on CFC. The report displays information about CFC. From general such as company name, address, registration number, share, to specific financial and tax information such as income, profit calculation, dividends, number of employees, etc. Copies of CFC reporting are attached to confirm the profit. The first reporting year is 2022.
When to report. As a general rule, by May 1, 2023, along with the annual declaration of assets and income for 2022. Or by March 1, 2023, together with the corporate income tax return for 2022, if the foreign company was registered by a Ukrainian company.
An exception to the rules. It is possible to postpone and submit the 2022 report in 2024. The procedure is the same as described above, simultaneously with the declarations, but for 2023. At the same time, such an exception is not a violation and fines are not applied for reporting after one year.
- Pay taxes. The obligation to pay rests with the founders and beneficiaries of the CFC. A portion of the CFC’s profit is taxed, which is proportional to the share in the CFC.
Tax rates. Individual founders pay personal income tax at the rate of 18%, or 5% or 9% under certain conditions (receipt of dividends from Ukraine, distribution of profit before reporting, etc.). In addition, a military levy of 1.5%. The general term of payment is until August 1, 2023.
Founders-legal entities pay 18% corporate income tax. The general payment term is until March 11, 2023.
When are taxes not paid?
Condition 1:
- an agreement on the avoidance of double taxation (Ukraine and the CFC country) is in force, and
- the effective rate of income tax paid by the CFC is from 13% to 18%, or the CFC’s passive income is less than 50% of its total income.
Please note that the “effective rate” may differ from the income tax rate in the country of company registration.
Condition 2: the income of one resident of Ukraine (the founder of CFC) for all his companies does not exceed 2 million euros at the end of the reporting period.
Condition 3: CFC is a charitable organization that does not distribute the received income among its founders (participants).
Condition 4: CFC is a public company.
Do you have to be responsible for violating the legislation on CFC?
Penalties are provided for failure to submit a report or violation of submission deadlines, for concealing information about CFC and others.
For the first accounting years 2022-2023, administrative and criminal liability is not applied. Also, there are no fines for incorrect calculations of CFC profit.
Please note that preferential conditions are temporary and do not exempt from the obligation to perform actions. And the amount of fines is quite large for various violations. If we count as of 2022, the following fines can be determined:
- for failure to submit a report – 248 100 UAH
- for non-disclosure of CFC information in the report – 3% of CFC income or 25% of CFC’s adjusted profit.
- for failure to submit a notification – 744 300 UAH
Conclusions
The rules of the CFC will apply to almost every owner of a foreign company who is a resident of Ukraine. We recommend that you start preparing for the CFC processes in advance.
Actions may include the following:
🔹 to determine your compliance with the status of a controlling person;
🔹 whether it is possible to apply an exemption from taxation and in what cases;
🔹your responsibilities and actions in the specified terms (messages, documents, declarations, reporting, etc.)
In certain cases, situations are quite controversial or conflicting due to the lack of practice of applying norms. We will be happy to help analyze information about your CFCs and provide professional legal support on these issues.
If you are still choosing a country in which to register a foreign company, we recommend that you familiarize yourself with our guideline “How to choose a country for business relocation??”.
Share
Related articles
We use cookies to improve the performance of the site and enhance your user experience.
More information can be found in our Privacy Notice