CFC Consulting

Deoffshorization is the main slogan of developed and developing countries in the field of taxation at the beginning of the 21st century. Exchange of tax information and taxation of owners of CFCs (controlled foreign companies) have become the two pillars on which the fight against offshoring is built.

Whom it may concern?

We appreciate your time, so we won’t waste time on history and other “interesting facts”, we will first identify the things you can find out on your own and then move on to the things Legarithm experts can help you with. We would also like to draw your attention to the fact that the information below applies only to tax residents of Ukraine

You can determine yourself whether you are covered by the norms of the Law No. 466-IX by answering the following questions:

1. Do you own more than 50% in a company registered abroad (note that trusts, foundations, etc., unknown to Ukrainian law, are also included in this list and are called “entities without legal personality”)
2. Do you own more than 10% of shares in a foreign company, if together with other residents of Ukraine your total share exceeds 50%)
3. Do you or your related persons have effective control over the company registered abroad? One of the following is sufficient to establish a de facto control relationship:

• Providing binding instructions to the management bodies of the legal entity
• Negotiating and agreeing on material terms of agreements without the need for further approval by the management bodies of the legal entity
• Existence of a power of attorney for more than one year for execution of material transactions
• Execution of transactions with the bank accounts of the legal entity or the ability to block bank transactions
• The indication of the person as a founder when opening accounts

Most likely, if you have entered to this page, one of the above 3 points applies to you, but that’s not all you can easily determine for yourself.

CFC taxation

In fact, the Law establishes two main obligations:

1. Filing CFC reports and
2. payment of CFC tax. And while the first obligation applies to everyone without exception and we will return to its analysis later, the second obligation has exceptions and is often more interesting for our clients, so we will start with it.

So, you are exempt from CFC taxation if one of the following conditions applies to you:

1. The total aggregate income (namely income, not net profit) of all CFCs of one controlling person is less than 2 million euros at the end of the reporting period. The reporting period in this case is one year. If you have difficulties in calculating the total income, our experts will help you.
2. CFC is a public company – its shares are traded on a recognized stock exchange.
3. CFC is a charitable organization, which distributes the income for the benefit of its founders.
4. There is an agreement between Ukraine and the country of registration of the CFC on avoidance of double taxation or on exchange of tax information + one of the following requirements is met: 4.1. the CFC pays income tax at an effective tax rate of not less than 13%, or 4.2 The passive income is less than 50% of the CFC’s total income If, however, after much calculation and deliberation with the CFC status, you have come to the conclusion that none of these conditions apply to your situation, read more about the taxes applicable to CFC profits.

CFS Tax.

This is where the biggest difficulty begins. According to the definition of the Law, the object of taxation is the part of the adjusted profit of a CFC, which is proportional to the part owned (or controlled) by the controlling person as of the last day of the reporting period.

The CFC tax formula is as follows: CFC tax amount = (CFC EBITDA + tax differences from controlled transactions (Article 39 of the TCU) – tax differences applied to avoid double taxation) * share of the controlling person * tax rate.

Yes, it looks really volumetric and complex. It is for this reason, at this stage we can no longer say that you can easily calculate the amount of tax to be paid.

That said, the tax rate may be as follows:

For individuals –

1. Personal income tax of 9% + 1.5% (VS), if dividends were received before the filing of the CFC statements
2. Personal income tax of 18% + 1.5% (VS) on undistributed adjusted profit of a CFC

For legal entities – 18%, as a prime rate.

Here we should also clarify that the Law establishes the rule of “the first resident in the chain of ownership”, which means, for example, that if the right of a natural person to own a share in the CFC is mediated by the ownership of such natural person of a share in a legal entity which is a resident of Ukraine and is recognized as a controlling person, then such natural person will not be considered as a controlling person.

CFC reports

As mentioned above, if there are exceptions to taxation of CFCs, then there are no such exceptions to reporting, it must be filed by all persons who are controlling.

Reporting can be divided into:

1. CFC Reporting.
2. Notification of the UTS on:

• Cases of acquisition of a share in a foreign legal entity or commencement of actual control over a foreign legal entity, which creates a CFC legal relationship
• Establishment, establishment or acquisition of property rights to assets, income or profit of the entity without legal personality
• Alienation of an interest in a foreign legal entity or cessation of actual control over a foreign legal entity, which causes the loss of controlling status
• Liquidation or alienation of property rights to a share in the assets, income or profit of an entity without legal entity status

As for the report, it consists of duly certified copies of the financial statements of the CFC. The report also indicates the name of the CFC, the amount of the controlling person’s share, the shareholding structure, the amount of income, adjusted profit of the CFC, the amount of dividends received by the CFC from Ukrainian legal entities, the amount of profit paid in favor of the controlling person.

The CFC report reflects transactions with related persons and companies from “offshore” jurisdictions. Of course, everything is not so simple in this part, because the controlling authorities have the right firstly to request an audit in case they have doubts about the veracity of your financial statements and secondly they can request primary documentation on the CFC operations, if there were controlled transactions.

CFC Fines

And finally, about the saddest part.

The sanctions enshrined in the Law are really enormous, they concern reporting and are as follows:

1. Failure to submit the CFC report by the controlling person – 100 times the subsistence minimum for an able-bodied person (hereinafter referred to as s.m.);
2. Failure to submit the report on time – 1 s.m. for each day, but not more than 50 s.m;
3. Non-reporting of information concerning existing CFCs and/or non-disclosure of information on controlled operations – 3% of the CFC’s income or 25% of the adjusted CFC’s profit not shown in the Report, but not more than 1,000 s.m;
4. Failure to submit or submission of incomplete documentation upon request of the controlling body – 3% of the CFC’s income for which no documentation was submitted, but not more than 1,000 s.m;
5. Failure to submit a CFC report within 30 calendar days following the last day of the deadline for payment of financial penalties – 5 s.m., for each calendar day of failure to submit a CFC report, but not more than 300 s.m.