What Is It Controlled Foreign Companies (CFC) in Ukraine?

Controlled Foreign Companies (CFC) play a significant role in international business structures and tax planning strategies. Essentially, a CFC is any legal entity registered outside the home country of its controlling interests, which are typically individuals or entities residing in another jurisdiction. In the context of Ukraine, the concept of CFCs is defined by Article 39-2.1.1. of the Tax Code.

Types of CFCs:

  1. Legal entities: These include corporations, associations, and other formalized organizations.
  2. Entities without legal entity status: This category encompasses partnerships, trusts, funds, and similar structures. The full list of entities falling under this category is determined by the Cabinet of Ministers.

Identification of Controlling Persons:

Determining who qualifies as a controlling person of a foreign company is crucial for regulatory compliance and tax assessment. According to Ukrainian tax regulations, a controlling person is someone who holds a significant stake in a foreign legal entity. For a person to be considered a controller of a foreign company, one of the following conditions must be met:

Reporting and Taxation Requirements:

The obligation to report on CFCs and their associated taxation does not automatically imply a direct tax liability in Ukraine. However, failure to comply with reporting requirements can lead to penalties. The reporting process involves submitting notifications and reports through the taxpayer’s electronic portal on the State Tax Service website. These documents include notifications of acquisition or termination of participation in a CFC, as well as detailed reports on the CFC’s activities and finances.

Exemptions from Taxation:

Certain conditions may exempt CFC profits from taxation in Ukraine. These include the presence of a double taxation avoidance agreement between Ukraine and the foreign jurisdiction, effective payment of income tax by the CFC, or limitations on passive income generated by the CFC. Additionally, exemptions may apply if the combined income of all controlled foreign companies of a controlling person does not exceed a certain threshold, or if the CFC is engaged in specific activities such as charitable work.

Additionally, the adjusted profit of the CFC is not subject to taxation if any of the following conditions are met:

Penalties for Non-Compliance:

Failure to adhere to reporting requirements can result in substantial penalties. These penalties are calculated based on the subsistence minimum for able-bodied persons as of January 1 of the tax year. Penalties may be imposed for late submission of reports, failure to provide notifications, or incomplete reporting of CFC-related information.

Conclusion:

Understanding the intricacies of Controlled Foreign Companies is essential for individuals and entities engaged in cross-border business activities. Compliance with reporting and taxation requirements is crucial to avoid penalties and ensure regulatory adherence. Moreover, exploring exemptions from taxation can optimize tax planning strategies while maintaining compliance with applicable laws and regulations. As such, seeking professional advice and staying informed about evolving tax laws and regulations is advisable for anyone involved in international business operations.

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