What is the liability for a controlled company for failure to file a report (CFC)?

Controlled foreign companies (CFCs) are legal entities registered abroad, the share of which belongs to residents of Ukraine.

According to clause 46.4.1.5 of the Tax Code of Ukraine (hereinafter referred to as the TCU), the owners and beneficiaries of CFCs are obliged to annually notify the State Tax Service about the created or acquired CFCs. Failure to fulfill this obligation entails both administrative and tax liability.

The law firm "Prikhodko and Partners" emphasizes: failure to comply with this obligation entails significant sanctions.

1. Regulatory framework

• PKU, clause 46.4.1.5 — obligation to submit a notification about the CFCs.
• Code of Administrative Offenses, Article 1632 — administrative liability for failure to submit or untimely submission of a notification.
• PKU, Art. 126.1 — fine and penalty for failure to pay income tax on CFCs.

2. Administrative fines

According to Article 1632 of the Code of Administrative Offenses:

• Individuals: fine from 1,700 to 3,400 UAH;
• Officials: from 8,500 to 17,000 UAH.

In our experience, in the first two years after the introduction of the norm, about 12% of entrepreneurs received such fines due to negligence or lack of information.

3. Tax sanctions

If a CFC receives income, and it is not declared:

• Fine 100% of unpaid income tax;
• Fine 10% of the amount of unpaid tax.

Example: If the CFC had a profit of UAH 1,000,000, the tax is 15% - UAH 150,000. Failure to pay entails a penalty of UAH 150,000 and a fine of UAH 15,000, i.e. a total of UAH 315,000 in liabilities.

4. Practical example

The client "Prikhodko and Partners" owned shares in seven companies in different jurisdictions:

1. Cyprus (UAB) – 60%
2. Estonia (OÜ) – 55%
3. Hong Kong (Ltd) – 100%
4. Great Britain (Ltd) – 40%
5. Singapore (Pte Ltd) – 51%
6. USA (Delaware) (LLC) – 100%
7. UAE (Dubai FTZ) – 70%

Due to imperfect internal procedures, the client did not submit a notification for the first two years. The State Tax Service assessed fines for late submission totaling UAH 72,000 and a penalty on the CFC tax in the amount of UAH 450,000.

Decision:

• Legal audit of CFC — it was determined which companies were subject to control and which income was not declared.
• Preparing messages — Document packages for seven jurisdictions were formed and submitted to the State Tax Service in a timely manner.
• Appealing fines — thanks to clear evidence of the client's good faith, administrative fines were reduced by 50%, and the penalty by 30%.

How to avoid sanctions:

1. Conduct an audit of CFC: checking all companies in which there is a significant participation.
2. Timely submission of notifications and reports.
3. Regular monitoring of changes in the ownership structure and revenues of CFCs.
4. Legal support during inspections and appeals of State Tax Service decisions.

The role of "Prikhodko and Partners"

The law firm "Prikhodko and Partners" provides comprehensive support:

• Audit of the CFC: identify all companies and assess risks.
• Preparing messages: document packages for the State Tax Service in all jurisdictions.
• Inspection support: protection of the client's interests in administrative and judicial proceedings.
• Consultations: clarification of legislative changes and recommendations for optimizing the structure.

According to our practice, full support of CFC reduces the probability of fines from 12% to 2% and reduces overall financial losses by 70%.

Conclusion

Maintaining timely and correct reporting on CFC is not only a legal requirement, but also a guarantee of financial security and business stability.

If you have foreign companies, contact "Prikhodko and Partners" for professional turnkey legal support to avoid fines and focus on developing your business.