Controlled Foreign Companies Tax Regulations
If you are a resident of Ukraine and you have passive income from foreign companies, check whether the new tax regulations apply to you.
The draft law on amendments to the Tax Code of Ukraine under No. 1210 was adopted by the Parliament/Verkhovna Rada of Ukraine and passed in January, and was finally signed by the President on May 21st, 2020. Among other changes to the Ukrainian legislation, the rules of controlled foreign companies (CFC) were introduced.
CFC Rules is the instrument for the tax authorities to prevent aggressive tax planning and tax base shifting. It prescribes that if a resident of some jurisdiction has significant control over a business entity that is structured in the jurisdiction with an extremely low profit tax rate, the income of such business entity shall be declared and taxed in the jurisdiction of the person with significant control.
The taxpayer of the CFC income is the person that holds such control.
The company is deemed as the CFC controlled by a private person – resident of Ukraine when:
1) a private person-resident of Ukraine owns a share in a Company which is more than 50%;
2) a private person-resident of Ukraine owns a share in a Company which is more than 10%, provided that several individuals-residents jointly hold more than 50% of shares in such Company;
3) a private person-resident of Ukraine performs effective control over the foreign business entity (CFC) independently or jointly with the other individuals-residents.
Please note, the CFC income is exempt from taxation if:
– there is a valid double taxation treaty and/or an agreement on tax information exchange between Ukraine and the country where the CFC is located
– either CFC pays income taxes (and the rate is at least 13%)
– the part of the passive income of the CFC is no more than 50%. At the same time, such passive income may be more, provided that such a company has sufficient resources to perform its business activity (staff, equity, etc.) and employs capital in business activities, which results in active income.
Besides, the CFC income is not taxable under any of the following conditions:
– the total income of all the CFCs of one controlling person (from all the sources) does not exceed € 2 million by the end of the reporting period;
– a CFC is a public company, the shares of which are traded on a recognized stock exchange;
– a CFC is an organization that, under the legislation of the relevant foreign jurisdiction, performs charity work and does not distribute income in favor of its founders (participants).
Controlling persons are obliged to submit a report on Controlled Foreign Companies to the Tax Office, simultaneously with the annual declaration on property and income, or corporate income tax return for the relevant calendar year, in e-form bearing an e-signature, in compliance with the law on electronic document management. The report form is to be provided by the Ministry of Finance. No such report form exists yet.
Please consider, that even if the CFC income is exempt from taxation, the controlling person shall submit a report to the tax authorities anyway. The controlling person has to indicate in the tax report the reasons for the tax exemption. In this case, the controlling person is released from the obligation to calculate the profit of the Controlled Foreign Company. At the same time, all other parts of the tax report have to be complete.
The new law provides liability for such violations:
– failure of the controlling person to report on the CFCs;
– late submission of the report;
– failure of the controlling person to disclose some information in the CFCs report.
No penalties and fines during the determination and calculation of CFC income for 2021-2022. Later on, the law imposes a fine in different amounts depending on the violation type: from 50 to 1000 amounts of subsistence level (the current subsistence level = 2197 UAH).
The CFC rules come into force on January 1st, 2021, so all the shareholders still have time to check whether such rules apply to them and get prepared to comply with all the formalities.