Drawing Up CFC Reporting

According to the legislation, if a tax resident of Ukraine owns a share in the amount of 50% or more in a foreign legal entity; or owns a share in the amount of 10% or more, provided that several individuals or legal entities, residents of Ukraine, own shares in a foreign legal entity, the aggregate size of which equals to 50% or more; or exercises effective control over a foreign legal entity, they are considered the controlling person of the CFC.

The controlling person is obliged to submit the CFC report. Article 39-2 of the Tax Code of Ukraine (Controlled Foreign Companies) comes into force on January 01, 2022. Thus, the controlling person submits a report on controlled foreign companies for 2022 at the same time as filing the annual declaration for 2023, including the adjusted profit of the controlled foreign company for 2023 indicated in such a report. The specifics of calculating the adjusted profit of a controlled foreign company come into effect on January 01, 2023.

Please note the following:

  • The financial annual report attached to the CFC report will indicate the ownership (assets) of a foreign company that is a tax resident of Ukraine.
  • The adjusted profit received by the CFC is considered to be distributed among the shareholders (beneficiaries) and is taxed at the rate of 18% + 1.5% of the military duty.
  • Penalties in the amount of UAH 220,000 have been established for failure to submit the CFC report.
  • Submission of the CFC report may have implications for the transfer pricing reporting, since the ownership structure of the CFC is disclosed, and it may be linked through related parties in Ukrainian counterparty companies;
  • Since there are no aspects similar to the amnesty and liquidation of the CFC, a beneficiary may raise suspicions about the legality of obtaining the ownership of assets of the CFC, especially if they are located in Ukraine.

There is not much time left to decide on these issues: whether they are necessary, and if so, which ones and what status CFCs in the business structure, not required to be liquidated by legal procedures, should have. It is necessary to decide what assets should be left (created) for these companies, and information on them must be submitted in the financial statements of the CFC. It is possible to plan to receive official income from the CFC in the form of dividends (9% tax, less than on income from the asset management company).

K.A.C. Group experts will help to resolve these issues, as well as the following ones:

  • Development of an individual system of measures to eliminate or minimize risks associated with the application of CFC rules (including the risks of applying transfer pricing requirements), along with changes to the existing corporate structure.
  • Liquidation of the CFC without negative consequences.
  • Preparation of the CFC reporting under the IFRS standards at the place of its registration, audit of reporting.
  • Drawing up the CFC notifications for the State Fiscal Service.
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