CFC: results for 2022-2023 and preparation for reporting in 2024

You are considered a controlling person if:

• You are a tax resident of Ukraine (either an individual or a legal entity);
• Your share in the CFC is more than 50%;
• Your share in the CFC is more than 10%, provided that several Ukrainian residents own shares in the CFC, the total size of which is 50% or more;
• You are the company’s beneficiary, or you actually control the CFC (providing instructions to management bodies, conducting transactions with bank accounts, signing contracts, etc.).

CFC obligations:

• Report changes (CFC registration, purchase-sale of shares, cessation of control, etc.) within 60 days from the date of the changes;
• Submit a CFC report for 2024 together with the annual income declaration in 2025 (by May 1);
• Pay income tax (18%, 9%, or 5%) and the military levy (1.5%) if there are no grounds for tax exemption.

However, this year’s reporting practice shows that many controlling persons are exempt from paying taxes.

Let us remind you of the grounds for such an exemption:

• A double taxation avoidance agreement or a tax information exchange agreement + the CFC effectively pays corporate income tax at an “effective rate” of 13% – 18% or higher. The effective rate is calculated using the formula: (amount of corporate income tax paid by the CFC: amount of CFC profit before tax) * 100%;
• A double taxation avoidance agreement or a tax information exchange agreement + the share of passive income of the CFC does not exceed 50% of the total revenue of the CFC, meaning the majority of the income is active;
• The income of all CFCs of one individual does not exceed the equivalent of 2 million euros at the end of the reporting period;
• The CFC is a public company whose shares (interests) are traded on a recognized stock exchange;
• The CFC engages in charitable activities.

The CFC report and the annual personal income and property declaration are submitted. Therefore, it is necessary to prepare documents and data regarding the CFC and individual income.

Preparation of the declaration and report for 2024: required documents and data

To prepare the declaration and report for 2024, we recommend gathering the following documents and data (the list is indicative and may be adjusted depending on the specific situation):

• Electronic Digital Signature (EDS) key (the declaration and report are submitted online through the Taxpayer’s Electronic Cabinet);
• Financial statements of the CFC (translated into Ukrainian and notarized);
• Statutory (registration) documents of the CFC and documents of the CFC co-founders;
• Certificates of income of the individual;
• Documents confirming the receipt of income (for example, a property sale agreement, a gift agreement, a lease agreement, a license agreement, an inheritance certificate, bank statements/certificates, etc.).

Penalties are provided for failure to submit or late submission of CFC notifications and reports. For example, as of 2024, the fines are:

• 268,400 UAH – for failure to submit a CFC report
• 134,200 UAH – for late submission of the CFC report
• 805,200 UAH – for failure to notify within 60 days.

The amounts of fines change annually.

However, we would like to draw attention to the fact that on May 9, 2024, a law (Bill No. 10168-2, dated November 6, 2023) was adopted that cancels the application of fines for a certain period. Specifically, from January 1, 2022, during the period of martial law, and for 6 months after its termination. As of May 30, 2024, the law is awaiting the signature of the President of Ukraine.

Conclusions

First, we advise you to understand the definition of tax residency. After that, check whether you are considered a controlling person, what actions regarding the CFC you need to take in your situation, whether there are grounds for tax exemption, and what tax rates to expect.

Although the adopted law exempts from fines, we still recommend not postponing the CFC issue until the last moment. This will help to avoid contentious situations and potential disputes in the future.

If necessary, our lawyers, accountants, and auditors will consult you on CFC matters and assist with report submission.