Taxes and reports of controlled foreign companies – a roadmap for IT

How to check if a company has CFC

A company becomes a CFC if registered in a foreign jurisdiction, is a legal entity, or is an entity without legal entity status. There is no exhaustive list of CFC forms; they can be companies, partnerships, societies, trusts, foundations, associations, organizations, etc.

Usually, a company registered outside of Ukraine will be considered a CFC.

How do you determine if you are a controlling person of a CFC?

We check the percentage of your interest in the CFC, your tax residency, and what powers you have as a beneficiary.

The controlling person must meet two criteria at once:

The first criterion to be a resident of Ukraine – an individual or a legal entity (a CFC can be founded by Ukrainian companies);

The second criterion: the share in the CFC of one person must be more than 50% or more than 25%* if the co-founders of the CFC are residents of Ukraine, and the total share is more than 50%;

Or (instead of the second criterion)

The person is the ultimate beneficial owner or actual control over the CFC (general power of attorney, carrying out operations with bank accounts, concluding agreements, giving instructions to management bodies, etc.).

If you have verified that the company is a CFC and you are a controlling person, you are subject to the rules of the CFC and have tax obligations and liabilities – fines.

 

CFC reporting: what it is and when to report it

There is an obligation to notify the Tax Inspectorate of Ukraine about the registration of the CFC, the purchase or sale of a share, and the beginning and termination of control over the CFC. The deadline for submission is within 60 days after registration, purchase, sale, etc., or if such actions take place from January 1, 2022.

The approved notification form must be filled with all CFC data (name, address, code, founders, etc.) and submitted online from the Payer’s Electronic Cabinet.

Please note that the message must only be “shown” to the tax office. All controlling persons submit notifications without exception.

The fine for failure to report is UAH 717,900 (for the 2022 reporting year) and UAH 805,200 (for the 2023 reporting year).

Report on CFC

How to make a report on a CFC? Consider the example of an individual who controls such a company.

The report is not submitted separately but with the tax declaration on assets and income. This is the declaration in which income for the previous year is reflected, for example, from selling real estate, renting, or receiving an inheritance.

The report provides information on CFCs, including service income, income from other activities, income before taxes in a foreign jurisdiction, adjusted CFC income, and its calculation. However, the computation is not submitted if there is a reason not to pay taxes in Ukraine.

Like the notification, the report is submitted by all control persons.

There are several options for submitting a report (in any case, online with an Electronic key through the Payer’s Electronic Account and simultaneously with the declaration):

Option 1 – by 01/05/2023 – a full report for the CFC for 2022 and copies of the financial statements of the CFC;

By 01.05.2024, provide a full report for the CFC for 2023 and copies of the CFC’s financial statements.

Option 2 — by 01/05/2023 — abbreviated report for 2022, by 31/12/2023 — full report and copies of financial statements of CFC, or copies of statements by 01/05/2024;

by 01.05.2024 — abbreviated report for 2023; by 31.12.2024 — full report and copies of financial statements of CFC, or copies of statements by 01.05.2025;

Option 3 – by 01/05/2024 – full CFC report and copies of CFC financial statements for 2022-2023*

* The next submission of the report for 2024 will continue to take place annually. Submission of the report simultaneously for two reporting years is not expected; this is a one-time preferential condition.

The fine for failure to submit a CFC report is UAH 239,300 (2022) and UAH 268,400 (2023).

The fine for late submission of the report is UAH 119,650 (2022) and UAH 134,200 (2023).

Payment of taxes and exemption from taxation

In Ukraine, only a part of the adjusted profit of the CFC, which is proportional to the percentage of the share of the founder/participant of the CFC, is taxed. Calculations are made based on reporting and the amount of the CIC’s profit before taxes.

The controlling person pays taxes in Ukraine.

Taxes for individuals, paid by August 1:

• military levy – 1.5%
• personal income tax — 18% general rate (a special rate of 9% or 5% — if there is distribution of profits or dividends from Ukraine).

Under what conditions are taxes not paid:

Condition 1: a convention between Ukraine and the country of registration of the CIC and if the CIC pays income tax at the “effective rate”* of 13%-18% and higher;

Condition 2: the convention and the passive income of the CFC (dividends, royalties) make up less than 50% of the total income of the CFC;

Condition 3: At the end of the reporting period, the total income of all foreign companies of one controlling person from any source does not exceed €2 million.

* effective rate — as a general rule, this is not the rate of corporate tax (income tax) in a foreign jurisdiction; such rate is calculated according to the formula: (the amount of tax paid by the CFC divided by the amount of the CFC’s profit before taxes) multiplied by 100 %.

The return must still be filed if the CFC’s income is exempt from tax. However, the calculation of CFC’s adjusted profit must be carried out and reflected in the report.

Instead of conclusions, there are examples of practical cases

Example № 1

IT company “A,” registered in Portugal, provides software development services. CFC’s annual revenue is €2.5 million. The company received royalties (passive income) totaling €500,000.

The controlling entity, company A, is exempt from taxation because there is a convention between Ukraine and Portugal, and passive income is less than 50% of the total income.

Example № 2

A resident of Ukraine, “Person 1” has a 45% stake in CFC. The co-founder, a resident of Germany, “Person 2,” has a 55% share. “Person 2” is also a director and beneficiary of the company.

The resident of Ukraine, “Person 1,” is not subject to the CFC rules because the share is less than 50%; the co-founder of the CFC is not a resident of Ukraine, and “Person 1” is not a beneficiary and does not influence the CFC.

Example № 3

Company “K” is registered in Cyprus and provides IT services. The founders of CFC are two people (50% each) who are residents of Ukraine. CFC annual revenue €3 million Effective tax rate 2.5% via IP-box. A convention was signed between Ukraine and Cyprus.

The founders are subject to CFC rules because they are residents of Ukraine, and their total share in the CFC is 100%. The founders pay taxes because the exemption terms do not apply — the income is over €2 million, and the effective rate is less than 13%.

Example № 4

Resident of Ukraine “Person 1” is the sole founder (100% stake) of four companies: Czech Republic, Poland, Slovakia, and Bulgaria. All companies receive both active and passive income. Each CFC has an annual income of €499,000.

The controlling person is subject to CFC rules (a resident of Ukraine, and shares in CFC are 100%). However, the tax exemption applies because the total income is €1,996,000, less than €2 million.