Taxation of controlled foreign companies in Ukraine

Controlled foreign companies (CFCs) have become an important component of the global economy, in particular for Ukrainian enterprises and investors.

In connection with the growth of globalization and international trade, the issue of CFCtaxation is becoming more and more important for Ukrainian organizations and tax authorities.

The main legal aspects of the CFC regulation

Controlled foreign companies, commonly known as CFCs (Controlled Foreign Companies), are companies controlled by residents of another country.

Ukraine also has its own legislative acts that regulate the taxation of CFC.

Ukraine, as an active participant in the global economy, establishes its own legislation and rules that regulate the functioning and taxation of such companies on its territory.

Therefore, in the context of Ukraine, CFCare defined as foreign legal entities that have a control structure with Ukrainian residents or natural persons who have the status of residents of Ukraine for tax purposes.

Income taxation of Controlled Foreign Companies in Ukraine

According to the tax legislation of Ukraine, the profit received by the CFC may be subject to taxation in Ukraine if residents of Ukraine have control or significant influence over the activities of these companies. According to Article 134 of the Tax Code of Ukraine, the profit of the CFC is included in the total income of residents of Ukraine and is taxed according to standard income tax rates.

In particular, the taxation of the profit of the CFC for a legal entity will be carried out at the basic rate of 18%.

The object of taxation at these rates is a part of the adjusted profit of CFC based on the results of non-consolidated financial statements compiled for the reporting calendar year.

For example, the founder of a foreign company with 50% of the authorized capital pays tax on only half of the company’s total income (adjusted income for a Ukrainian resident, which is specified in the special individual reporting for a specific company).

Regarding the specifics of taxation of dividends and other payments from controlled foreign companies – dividends and other payments received from CFC may also be subject to taxation in Ukraine.

According to the Tax Code of Ukraine, such incomes are subject to income tax of individuals and legal entities in accordance with the established rates, and that is why taxation will be carried out at the following rate:

• Military levy — 1.5%;
• Income tax:
• 5% (if the profit of the CFC was obtained from the distribution of dividends from Ukrainian companies);
• 9% (when distributing dividends from Ukrainian joint investment institutions or business entities that are not taxpayers);
• 9% if an individual distributes income from CFC for reporting purposes;
• 18% for other cases.

Reporting requirements for CFC

Residents of Ukraine who have control or significant influence over CFC must comply with reporting requirements to Ukrainian tax authorities.

This may include the obligation to submit financial statements and other information regarding the financial status of the CFC.

The CFC report is submitted together with the annual declaration of assets and income. It contains general information (name, address, etc.), information about the ownership structure, and other information.

International agreements and double taxation

Ukraine has a number of international agreements on the avoidance of double taxation, which can affect the taxation of the income of CFC and payments from them. These agreements may include provisions on the exchange of information and determination of taxation rules.

So, a controlled foreign company (CFC) is a foreign company that is controlled (defined in the relevant tax laws) by residents of a specific country.

Taxation of controlled foreign companies is a complex and important topic for Ukrainian enterprises and investors.

Regulation of this process requires attention to domestic and international legal norms, as well as consideration of the specific circumstances of each case.