Finance Inspectors Target Overseas Accounts and Businesses of Ukrainians

Опубликовано: 09.10.2020

Finance Inspectors Target Overseas Accounts and Businesses of Ukrainians

Published: 09.10.2020

The state wants to know all the financial secrets of its citizens. The icing on the cake should be the tax amnesty law, after the approval of which information on the foreign assets of Ukrainians will become the property of the regulatory authorities.

Volodymyr Harkusha, Managing Partner of K.A.C. Group, talks about what is behind the impending tax amnesty in an article for the Ministry of Finance.

Domestic legislation is systematically moving towards strengthening control over citizens’ income. This movement can be traced quite clearly if you look at the latest laws and projects that are being drafted:

Law No. 2692 implements the international MLI standard (control over passive income of non-residents),

Laws No. 322-IX and No. 323-IX stipulate automatic exchange of information between the regulatory authorities of Ukraine and other countries (CRS, FATCA),

Law No. 466-IX regulates the taxation of foreign companies controlled by residents of Ukraine (CFCs),

Law No. 361-IX strengthens financial monitoring functions,

Bill No. 1232 concerns tax amnesty.

What Does it Mean?

The implementation of a full-fledged system of automatic exchange of information (CRS) into Ukrainian legislation allows Ukrainian fiscal officials to receive both operational and retrospective (!) information about foreign assets of tax residents of Ukraine. We are talking about corporate rights, securities, bank accounts, movable and immovable property.

Foreign businesses and assets are being connected to Ukrainian controllers (beneficiaries) through foreign companies (CFCs) controlled by them and BEPS (actions to prevent the withdrawal of income from taxation), including for the purpose of linking Ukrainian businesses with CFCs through a single beneficiary (controller) and access to control over foreign economic transactions in the context of transfer pricing.

There is a possibility to legalize foreign businesses and assets through the zero-declaration law. Bill 1232 is planned to be adopted by the end of 2020, and the procedure for passing the “tax amnesty” itself should be extended for 2021-2022. The Chairman of the Profile Committee of the Verkhovna Rada, Danylo Hetmantsev, declares 2021 as the final year after which a total search for illegal assets will begin.

Subsequent taxation of income from legalized foreign businesses and assets at the level of controllers (beneficiaries) in Ukraine takes place against the background of the broadest possible interpretation of the definition of “center of vital interests”, when changing the place of tax residency will not make sense.

Legally established total cost control. The controllers will assess whether the spending is related to the declared income through the taxpayer’s personal electronic account. This has already been partially implemented in the recently adopted Law No. 2524. The changes in 2020 to Law No. 361-IX expanded not only the base, but the functions and responsibilities of the subjects of primary financial monitoring (notaries, lawyers, auditors, banks, AMC).

The result will be the creation of the broadest practice of applying tax sanctions for failure to submit/ untimely submission/distortion of data in numerous reports and declarations. At the same time, there will be access to the controller (beneficiary), i.e. to their property, both abroad and in Ukraine. As a variant of pressure, there will be a restriction on the disposal of property, movement, criminal prosecution.

Amnesty Based on the “If You Don’t Want To, We Will Force You” Principle

The tax amnesty should become a key one in this series. The ideologists of legislative innovations are convinced that it will allow filling the budget with proceeds from amnestied assets, as well as attracting investments from the returned capital.

In fact, we are talking about the possibility not only to legally legalize capital from which taxes have not been paid, but also to whitewash assets of a dubious origin. The authors of the legislative innovations in the comments, of course, clarify that it will be impossible to legalize “dirty” money.

But the text of the documents themselves suggests otherwise. Bill No. 1232 directly states: “…such income shall be considered amnestied without any additional conditions… tax audit of the sources of origin of such income shall not be carried out.”

On the other hand, the very “voluntariness” of the forthcoming amnesty will be very conditional. With the full implementation of automatic information exchange, hiding assets will be pointless and painful in terms of possible consequences. The global goal of the upcoming innovations is to “bring to light” the assets that are already taxed in the working order voluntarily and forcibly.

It will be difficult to ignore the desire of the state. For example, the fine for an undeclared CFC will be UAH 2,000,000 per item. The nice point is minimum tax rates on legalized assets. President Volodymyr Zelenskyi said: “…if a person has real estate or other objects, we need to make allowances, and you can amnesty property at a lower percentage, or even at 0%.”

Obviously, this proposal can be included in the final law on the tax amnesty. Danylo Hetmantsev has recently declared that the basic principles of zero declaration have already been determined, and now the relevant committee is awaiting the presidential version of the bill.

Two Options to Legalize Foreign Assets

So far, the Rada has registered two bills on this topic. Both of them provide for the declaration of foreign assets: the Bill of the profile committee No. 1232 and the alternative one No. 1232-1 by the Deputy Nina Yuzhanina.

The first bill makes it possible to legalize assets both “at home” and abroad for 5% one-time. The second on proposes to pay tax on foreign assets at a rate of 9%. Cash under the first version is legalized for 10%, under the second one – at 18%. Thus, it will be possible to whitewash money that does not yet exist – for the future cases, so that later there will be no questions.

The cost of legalizing large sums can be reduced by placing them in government bonds. In this case, you will only need to pay 2.5. Assets are entered in a special declaration, which is submitted by the end of 2021. This declaration provides not only for the legalization of income from which taxes have not been paid, but also of assets that were acquired for such income. Confirmation of the sources of acquisition of the assets will not be required.

In his recent interview, Danylo Hetmantsev recalled that with the introduction of the main BEPS standard, CRS (automatic exchange of information), the state will in any case identify the owner of assets that have not passed the tax amnesty, with all the ensuing consequences.


The second option for the legalization of foreign assets is the use of Article 170.13 of Law No. 466-IX, which provides for the possibility of not paying tax on foreign assets of controlled foreign companies, if they are liquidated.

In this case, it will also be necessary to submit a special declaration indicating the assets of the liquidated company, information on it and its financial report along with an auditor’s report. The corresponding article of the Law does not contain a clause that the owner of a CFC does not need to confirm the sources of origin of assets.

However, there is one nuance: the Law applies to legalized assets only if all its requirements are met, that is, the tax office can still impose a fine on the declared assets if, for example, at least one document is not provided on time.

In addition, both the bills on tax amnesty and the existing CFC Law leave many questions unanswered. And this means that they are already creating potential conflicts between the participants in the declaration campaign and the tax authorities.

Here are some of them. What to do with the 1.5% military tax in cases with both laws? How to evaluate foreign property amnestied when calculating tax? Draft 1232 clearly refers to the transfer of amnestied money from accounts of foreign banks to Ukrainian banks (or government bonds), while Law No. 466-IX does not have this requirement. What to do with the stocks of shares placed on foreign financial markets? Should they be returned? Where to?

Who Will Be Affected?

Not only oligarchs, as it might seem at first glance, will have to solve these problems, but also hundreds of representatives of the Ukrainian middle class, since many also own property, which falls under the term “foreign assets”. The most common options are:

Bank accounts in foreign banks that were opened in person: a kind of stash “just in case” that can be used when visiting a European (and not only European) country. There may be several hundred euros on the account – it does not matter: the size of the amounts is not decisive for the Ukrainian legislation.

Property. Indicative is the number of restaurants, hotels and service stations owned by citizens of Ukraine, for example, in Slovakia. Or look at the number of cars with Lviv and Transcarpathian numbers near apartments in Croatian Istria, owned by our compatriots.

Online marketplaces that sell anything, from American cars to flowers. Most of them work through payment systems in foreign banks.

“Service providers” with a large share of foreign consumers. And these are not only the notorious IT workers, but also outsourcers, primarily designers in various fields, marketers, coaches, etc. They use systems like PayPal and payment cards in foreign banks.

It should be mentioned that the size of fines for foreign assets undeclared in time and for the failure to submit declarations and reports on them are the same for oligarchs and ordinary citizens.

Formally, there is less than a year left to decide on options for legalizing foreign assets. At the same time, you will have to think about building a model for obtaining legal income from your foreign assets with optimal tax payments for the future.


Read more:

Tax service will have free access to the accounts and safes of bank customers

Tax amnesty. What for?

How bankers find dirty money launderers among their customers

International tax planning and structuring

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