CFC report

The concept of CFC is quite new for Ukraine. Legislation regulating this issue came into force only in 2022. First of all, it is necessary to correctly define what CFC is and who is the controller of CFC.

The Tax Code defines CFC as “any legal entity registered in a foreign country”. That is, if a person has Sp. z o. o. in Poland (an analog of an LLC), it will be considered a CFC, and if there is an autonomous in Spain, it will not be considered a CFC (an analog of a FOP).

If a person is the owner of a legal entity in Ukraine, that opened a company abroad, this person does not have a CFC. This legal entity will have a CFC.

CFC controllers include natural persons – residents of Ukraine and legal entities registered in Ukraine that have connections with foreign legal companies.

For example, a person is the owner of a foreign company, and accordingly, that person is the controller in respect of such CFC.

The second example: a person makes calculations based on bank details and makes management decisions in a foreign company, that is, you directly influence the activities of this company, and in this case, the person is also a controller of such CFC.

According to Ukrainian legislation, there are 2 requirements for the CFC controller:

• notify the Tax Office in electronic form of the fact of obtaining or losing the status of the owner of the CFC within 60 calendar days from the occurrence of such fact
• submit annual reports within the annual reporting period (for individuals – a tax declaration on property status and income with an attachment on CFC, i.e. by May 1, for legal entities – income tax reporting with an attachment on CFC, i.e. by March 1).

If a person became a CFC controller even before the adoption of the Law, he has only the obligation to submit CFC reports, and it is not necessary to notify the Tax Office.

What if a person misses the 60-day notice period?

We do not recommend neglecting the duties described above, because a fine of up to UAH 1 million is foreseen. In its explanations, the Tax Office talks about the penalty for non-notification in general, that is, there is no penalty for late notification as such.

That is, the main thing is to notify the Tax Office before submitting the report on the CFC or before the Tax Office does not contact the person.

Importantly! Only a person who owns a share of 50% or more or owns together with other residents of Ukraine a combined share of 50% or more, while personally owning a share of 10% or more, is the controller of CFC . If a person has several CFC , each should be treated separately.

Is it necessary to pay tax on the income of CFC in Ukraine?

To understand whether it is necessary to pay such a tax, first of all, it is necessary to calculate the adjusted income of each CFC person.

The adjusted profit of the CFC is the profit of the CFC multiplied by the weighted average exchange rate of the NBU of the currency used.

If the adjusted income of all CFC of a person exceeds 2 million euros at the end of the reporting year, the person must pay tax on the income of CFC in Ukraine.

A tax of 18% + 1.5% military levy applies (for individuals) on the entire amount of income exceeding 2 million euros, or simply 18% (for legal entities).

Importantly! If the CFC has only active income as a result of its activity, no tax is paid. The tax is paid only if passive income (shares, deposits, royalties, rental of real estate) exceeds 50% of the total income of the CFC .

The problem may arise if in the foreign jurisdiction where the CFC is registered, reporting takes place more than once a year, that is, we are talking about a reporting period different from the calendar year. And for CFC reporting in Ukraine, CFC reporting is required for the calendar period.

In this case, the CFC controller needs to organize reporting and accounting for the foreign legal entity to form calendar reporting.

This can be done with the help of an auditing company that will make a report different from the reporting period in the foreign jurisdiction, or an accountant that will keep the accounts of a foreign legal entity.

When do you need to start reporting?

According to the legislation, the first report can be submitted in 2024 for 2022 and 2023.

That is, if you submit the first report in 2024, you must submit a separate report on the CFC for 2022 and 2023, you do not need to submit the income declaration for 2022 and 2023 separately (only for 2023) and attach an appendix containing a separate financial report by CFC for 2022 and 2023.

If you need help in submitting a CFC report or consultation to determine the status of a resident of Ukraine, as well as the obligation to submit a CFC report, contact the specialists of the Prikhodko and Partners law firm.