What may change in the CFC rules

Definition of “controlled foreign company”

Currently, a controlled foreign company (CFC) is any legal entity registered in a foreign country and controlled by a resident of Ukraine.

It is proposed to expand the term “controlled foreign company” to include:
– any enterprise, institution, or organization established and registered in a foreign state or territory with the status of a legal entity that is not a resident of Ukraine
– any foreign entity without the status of a legal entity that may distribute income (profit) or provide assets for use in favor of its founders, participants, members, beneficiaries, ultimate beneficial owners, or other persons.

Status of a controlling person

Whether the founder of a CFC will be considered a controlling person depends on the size of his/her share in the CFC.

According to the current rules, a CFC is a controlling person if the share is more than 50%. That is, we can assume that it is 51% because it is more than 50%.

However, according to the explanations of the tax authorities, it is precisely 50%. Therefore, there is a conflict, which may lead to disputes with the tax authorities.

It is proposed to determine the status of a controlling person as of December 31 of the relevant calendar year. The share size should be changed from: “more than 50%” to: “50% or more“. Thus, the discrepancy in the interpretation of the share size will be eliminated.

Actual influence on the CFC

Controlling persons are not only the founders of foreign companies but also beneficiaries and those who have actual influence on a CFC.

There is a proposal to expand the list of circumstances that indicate actual influence on a CFC and may indicate that a person is controlling.

The list of such circumstances is as follows:

– a nominee director is appointed for more than 183 days in the reporting year and is required to follow the instructions of another person; such other person is considered a “controller” or “controlling person”;

– the CFC issues a general power of attorney or a power of attorney with the right to alienate, provide for use, or acquire property to a representative; a power of attorney is for a period of more than 183 days, and the representative does not coordinate any actions with the CFC’s management bodies; accordingly, such a representative can be considered a controlling person.

CFC report

Controlling persons are obliged to submit a CFC report simultaneously with submitting an annual property and income tax return or a corporate income tax return for the calendar year following the reporting year.

If the reporting year is 2023 and the declaration is for 2024, then the report and declaration are scheduled to be submitted in 2025 (by May 01).

Submission of a shortened report if no financial statements have been prepared and a full report by December 31 is not expected.

Exemption from taxation

The draft law changes one of the grounds for tax exemption if the income is up to EUR 2 million. The new wording reads as follows: income from any activity (net of indirect taxes), all controlled foreign companies of the same controlling person from all sources, determined according to the separate financial statements, does not exceed the equivalent of EUR 2 million for the reporting period.

Fines for late reporting and non-reporting under CFC have been reduced

According to the draft law, late submission of a notice to the tax service on the acquisition of a stake in a CFC, registration of a CFC, actual control over a CFC, alienation of a stake, termination of control, etc. entails the imposition of a fine of up to UAH 67,100 (the amount as of 2023 is calculated from the subsistence minimum).

The fine for failure to notify is proposed to be reduced to UAH 134,200. (amount as of 2023). According to current regulations, the fine is UAH 805,200. That is, the reduction of fines is significant.

It is proposed not to apply penalties for late notification from 01.01.2022 to the date of entry into force of the Law “On Amending the Tax Code of Ukraine on Improving the Taxation of Controlled Foreign Companies.”

Inquiries from tax authorities

The tax authorities have the right to inquire about CFCs to the controlling person. The controlling person is obliged to provide an answer and supporting documents.

The bill proposes an opportunity to submit an audit opinion on CFC financial statements and the CFC report. If the opinion is submitted, there is no obligation to submit additional supporting documents.

Unscheduled documentary tax audit

The draft law provides grounds for the inspection:

– failure to submit a CFC report;

– failure to respond to requests from the tax office;

– non-display of information about CFCs, about existing CFCs in the report;

– failure to report on CFC.

It is allowed to conduct up to one inspection of the controlling person during 3 calendar years.

Translation of CFC documents

Documents/copies of documents written in a foreign language will be submitted to the tax service by the controlling person with a translation into Ukrainian. The requirements of the current legislation will prepare the translation. We are talking about the notarization of the translation.

Conclusions

All of the above are only potential changes to tax legislation. While CFC responsibilities have not disappeared, the time required to check your CFC in terms of the tax residency of the founders, the size of the shares, grounds for exemption from taxation, to prepare the notice, report, declaration, etc.

We recommend that you do not delay or postpone your CFC issues for later. Start preparing for submission of notice and report now. Since the time for notification is only 60 calendar days, and the responsibility for non-notification has not yet been canceled, this is a fine of UAH 805,200. (for 2023). As a general rule, the CFC report must be submitted by May 1, 2024, the fine for failure to submit is UAH 268,400. (for 2023).