Light or shadow. Prospects of declaration of assetes

In an article for “Vlada Ta Hroshi”, Managing Partner of K.A.C. Group Volodymyr Harkusha reflects on the tax reforms that took place in 2021, in particular, the role of tax amnesty and declaration of assets through the reporting of CFCs, as well as makes forecasts of what awaits us in the tax sphere next year.

In 2021, there was a clear legislative emphasis on tax innovations. These include tax amnesty, tax-free legalization of assets through the liquidation of foreign companies owned by Ukrainian citizens, and declaration of foreign assets through reporting on controlled foreign companies (CFCs).

As a tax consultant and auditor, I have representative statistics on client practice. So, tax amnesty in the vast majority of cases is considered to be an option with little prospect of implementation. First, and not without reason, such legalization of wealth may be a predicate for the application of Art. 209 of the Criminal Code (legalization of proceeds from crime). Secondly, although “income declared as a result of a tax amnesty” is, according to the law, a confirmed source of its origin, financial institutions (banks, financial companies) mostly neglect it, referring to their financial monitoring rules. According to Danylo Hetmantsev, as of December 2021, budget revenues from the amnestied wealth of Ukrainian citizens amounted to about UAH 10 million, i.e., a little more than EUR 300,000. The amnesty expires at the end of next summer, but the trend tells a lot.

The processes of preparation for the liquidation of CFCs with foreign assets by Ukrainian entrepreneurs were characterized by a noticeable dynamic. A significant number of them decided to take advantage of the opportunities provided by Law No. 466-IX, which provides a tax-free opportunity for Ukrainians to declare real estate and funds received as a result of the liquidation of their own foreign companies. The initial enthusiasm was hampered by two significant reasons. The first one is purely technological in nature. It was necessary to deal with many administrative procedures related to liquidation processes. In addition, the actual transfer of assets (especially cash) is associated with additional banking compliance and due diligence procedures, in other words, financial monitoring. As such, not everyone who began to liquidate their own CFC with assets complied with the deadline set by the legislation of Ukraine, which was December 31, 2021. Secondly, the intricate information background of the process was created by government officials and taxpayers with their controversial interviews, interpretations and explanations. However, so far none of them has explained why the Ukrainian tax resident receives money without paying taxes, but monetary claims (which later materialize in money) may end up with possible withholding of PIT, although the source of both money and monetary claims may be the same. The consultation of the Ministry of Finance No. 256 did not clarify most controversial issues, and the possibility of extending the liquidation period to 2022 for objective reasons was referred to the subjective decision of tax agencies.

The very idea of ??squeezing a saved penny from Ukrainians in any way seems inhumane. In the conditions of permanent change of “previous criminal authorities”, total corruption, legislative swings, and now also war, the domestic conditional “middle class” was forced to react accordingly. Earnings materialized in foreign currency cash, real estate (including the one located abroad) and other assets. It is simply an instinct of self-preservation and thoughts about ??tomorrow, even about retirement. Additionally, the latest statements of the Head of the Ministry of Finance Serhii Marchenko already mention the possibility of additional taxation of real estate objects that were purchased a long time ago and do not have confirmed sources of origin and paid taxes. Add here the threat of using indirect methods of taxation.

Moreover, the ghost of the Law of Ukraine No. 4546, which provides for a significant expansion of the range of persons to whom the Deposit Guarantee Fund will be able to apply with claims for damages to clients of bankrupt banks, forces bankers to seek options to protect assets outside the legislative jurisdiction of Ukraine.

Consequently, the current practice shows that national businessmen refuse to hold legal assets in Ukraine and prefer to keep them as far away as possible. For such purposes, they choose Cypriot fiduciary trusts or private family funds of Liechtenstein.

Read more:

Tax Amnesty: How to Declare Cash and Cryptocurrency

Tax Amnesty: How to Deal with Fiscal Inspectors and Financial Monitoring