CFC – when taxes are not paid and in which cases the rates of 5%, 9%, 18% apply

There are CFCs, but no taxes are required

CFC is not always about paying or paying additional taxes because there are exceptions to the rules and many reasons why residents of Ukraine will not tax CFC profits.

Let’s consider 5 conditions under which the controlling person of the CIC should not pay personal income tax (PIT) in Ukraine.

No Obligation to Pay – No “adjusted profit” CFC calculations are made. Because such income is not included in the CFC’s taxable income of the founder or beneficiary.

1 condition. DTT or CRS between Ukraine and the country of CFC registration + actual payment of CFC income tax from 13% – 18% (the so-called “effective rate”).

Generally, the effective rate ≠ is the foreign jurisdiction’s corporate tax (income tax) rate. Such a rate is calculated according to a particular formula. You need to divide the amount of CFC tax paid by the CFC’s pre-tax profit and multiply by 100%. The final figure will be the effective rate in %.

2 condition. DTT or CRS between Ukraine and the country of registration of the CFC + passive income of the CFC does not exceed 50% of all income of the CFC.

Types of passive income: royalties, dividends, interest on a bank account, investment income, interest (discount) of a bondholder, interest or income on a certificate of deposit, income on placed assets, which is paid by the company that manages the assets of the mutual investment institution, etc.

3 condition. If you are the founder or beneficiary of several CFCs and the combined income of all companies does not exceed €2 million.

4 condition. CFC is a public company, and its shares (shares) are traded on a recognized stock exchange, namely in the listing of such an exchange.

Resolution of Ukraine’s Cabinet of Ministers approved an exhaustive list of stock exchanges dated December 16, 2020, No. 1275. Among them are the Cyprus Stock Exchange (Republic of Cyprus), Dubai Financial Market (United Arab Emirates), Euronext (European Union), NYSE (United States of America) and others.

5 condition. CFC is a charitable organization that does not distribute income to its founders

If there are no conditions for exemption from taxation

Let’s consider what taxes the controlling person (individual – the founder or beneficiary of the CFC) is obliged to pay. That is, in those cases, if the conditions for tax exemption are not met.

Military levy – everything is simple here; the 1.5% rate is the same for everyone, and there are no exceptions.

Personal income tax – there are three different tax rates:

18% is the general rate, applied with no exceptions to the rules.

9% – is used in two cases:

The first case is if 1) the CFC distributes profits, and the controlling entity receives foreign dividends before 01.05. of the year in which the report is filed, and 2) the controlling person includes such portion of the CFC’s earnings in its income as is taxable and reflected in its declaration of wealth and income;

The second case – if by 31.12. of the calendar year that is the second reporting year (for example, the reporting year is 2022, the first year after it is 2023, and the second year is 2024): 1) the CFC distributes profits, and the controlling entity receives foreign dividends, and 2) the controlling entity includes such part of the CFC’s earnings to its taxable and reportable income.

5% and 9% – applies if the CFC is the founder of companies in Ukraine. CFC Dividends = Controlling Income.

Taxation looks like this:

1) CFC is the founder of a legal entity in Ukraine, for example, an LLC, receives dividends from such an LLC

2) the amount of dividends is also considered the income of the controlling person of the CFC

3) if the LLC is an income tax payer in Ukraine, the controlling person pays personal income tax in Ukraine at the rate 5% if the LLC is a single taxpayer, the controlling person pays personal income tax in Ukraine at the rate of 9%.

Conclusions

Registration of a company abroad does not mean automatic payment of taxes for the activities of such a company according to the norms of the Civil Code. Because, in most cases, CFC rules are only designed to limit abuses when using companies from offshore/low-tax countries. Under the CFC rules, there are several exemptions, transitional provisions, or the absence of the obligation to pay or pay additional tax as such that the business can use.

To check whether you can take advantage of these conditions and calculate your potential tax liability, we recommend the following:

• check the existence of a convention or agreement on the exchange of tax information signed between the countries
• calculate the effective rate
• calculate the percentage of passive income
• perform income calculations of all CFCs
• check CFC status (charity or public company)

A conscious approach to corporate and tax planning will form an effective structure in every business.