Ukrainian businessmen ask to postpone filing of CFC reporting

30th of October, 2023

From the beginning of spring 2024, Ukrainian entrepreneurs who own at least a 50% stake in foreign legal entities will be required to report such companies to the State Tax Service. These foreign companies that are subject to mandatory reporting are called controlled foreign companies (CFCs).

The Union of Ukrainian Entrepreneurs (UEU) has asked the Verkhovna Rada to consider postponing the mandatory reporting of CFCs for the period of martial law.

What does the Union of Ukrainian Entrepreneurs oppose?

The Union of Ukrainian Entrepreneurs (UEU) has opposed the rules established by the Tax Code regarding controlled foreign companies (CFCs). These rules oblige every Ukrainian who has a foreign company, in which he owns a substantial share or which he actually manages, to submit annual reports on such a company in Ukraine. The CFC reporting must be submitted to the tax authorities together with the personal tax return of the controlling person (in the case of an individual) and contain information on the income of the CFC company, if any.

These rules were introduced to the Tax Code of Ukraine in 2020 and came into force from the beginning of 2022. They were introduced as part of the global BEPS initiative aimed at combating tax evasion through the use of offshore jurisdictions.

The UEU has asked the Verkhovna Rada to postpone mandatory CFC reporting for the period of martial law. According to the current legislation, those who have not yet reported must do so by May 1, 2024.

Will I have to pay taxes in Ukraine?

Yes, in case a Ukrainian owner of a foreign company does not plan to receive dividends and leaves the profits abroad, the controlled foreign companies (CFC) rules may force him to pay taxes in Ukraine. These rules stipulate that the entrepreneur will have to pay personal income tax (PIT) at the rate of 18% on the company's "undistributed" profits, even if the funds remain in the company and are not transferred to the owner's accounts, whether Ukrainian or foreign accounts.

Thus, CFCs oblige owners to accelerate the distribution of profits and payment of personal income tax, even if the profits remain in the company abroad.

Is this mandatory for all foreign companies with Ukrainian owners?

No. These rules do not apply to all foreign companies with Ukrainian owners. There are a number of exemptions and exceptions. For example, no tax on retained earnings will be required in the following cases:

  • businesses that have relatively small revenues, not exceeding €2 million for each CFC;
  • companies that are considered "active" and are located in countries that have a tax convention with Ukraine. To date, more than 70 countries, including European Union countries, the United States and Canada, have such treaties with Ukraine;
  • to public companies and companies receiving dividends from Ukraine.

In addition, if a foreign company-CFC has already paid taxes in its country of residence, the Ukrainian shareholder may take this tax as a deduction when calculating Ukrainian personal income tax (PIT). Thus, for most Ukrainians controlling a CFC, taxation applies only when receiving dividends, and even then there are benefits and deductions.

What then is the Union of Ukrainian Entrepreneurs (UEU) dissatisfied with?

There are several main reasons why the Union of Ukrainian Entrepreneurs (UEU) calls for postponing mandatory reporting on controlled foreign companies (CFCs):

  • Administrative burden. CFC reporting requires additional effort and resources from business owners. This includes both reporting and quality preparation of financial statements of all foreign companies, which is an additional cost in time and money.
  • Final Deadline. Business owners will have to file their 2022 reporting for all of their CICs in early 2024, and possibly 2023 if legislation does not change. This creates additional challenges and urgency for entrepreneurs.

Why business did not react to the introduction of CFC rules in 2020?

The exact reason why Ukrainian business did not react to the introduction of the CFC rules in 2020 may be varied and complex. Perhaps the level of trust in the authorities was higher then, and entrepreneurs did not feel such a need to protect their interests.

In addition, the entire period since 2020 has been characterized by a series of complex challenges, including pandemic and escalating military conflicts. These factors may have focused entrepreneurs' attention on more urgent issues and concerns, leaving attention to tax law changes in the background.

As the situation worsens and entrepreneurs become more dissatisfied, they may decide to more actively voice their concerns and demands regarding the CFC rules and their impact on the business environment in Ukraine.

What will be the reaction of the authorities today?

Predicting the reaction of the authorities in Ukraine can be unpredictable. Despite the position of entrepreneurs and calls to postpone or cancel CFC reporting, the response from the authorities may be varied.

However, it is worth bearing in mind that Ukraine is monitored by its international partners in the field of tax legislation. Any changes in the tax rules may be perceived as a departure from international standards for combating tax evasion.

From a technical point of view, repeal or postponement of the CFC rules should not be a disaster, but improving the legislation and amending the current rules may take time and effort. This may include postponing reporting deadlines and clarifying ambiguous and unfinished rules.

The Controlled Foreign Company Tax Improvement Bill 8137, which includes changes to the CFC rules, may be key in this process. In particular, it may propose moving the 2023 reporting deadline from 2024 to 2025 and making other changes to make the legislation more balanced and in line with the interests of entrepreneurs.

Is it possible not to report at all?

A Ukrainian owner of a foreign business has certain options to avoid reporting controlled foreign companies (CFCs), but they may require serious legal and financial steps:

  1. Change of tax residency. An individual can leave Ukraine and acquire tax residency in another country. In this case, the obligation for CFC reporting in Ukraine disappears. However, there are legal conflicts, such as how to deal with the first CFC reporting for a person who was a resident of Ukraine in one year and is not in the next. This may require consultation with tax experts.
  2. Transferring a business to a trust. An owner can transfer his foreign business into a trust. A trust is a legal construct in which the former owner no longer has ownership and management of the business. This may eliminate the CFC reporting obligation, but such a move may require the loss of control of the business.

It is important to note that each of these options has different legal and financial implications, and experienced tax advisors and lawyers should be consulted to make a decision so that all aspects and risks are considered.

The situation can be complex, especially when a business owner wants to retain control but avoid CFC reporting.

Conclusions

Despite calls and attempts to delay or postpone controlled foreign company (CFC) reporting in Ukraine, entrepreneurs should prepare for the fact that changes in legislation can be unpredictable and reporting may end up remaining mandatory as scheduled.

Ultimately, the decision on whether to prepare CFC reporting will be left to the discretion of each entrepreneur, but being prepared for different scenarios and being aware of the legal requirements can help to meet the challenges associated with this area of taxation.

To ensure that an entrepreneur does not have difficulties with the preparation and filing of their CFC reporting, Intelligent Solution Group's experts are prepared to provide:

  • legal analysis of the structure of foreign companies and determination of the presence of the controlling person status of Ukrainian resident individuals and legal entities;
  • legal analysis of CFC profit tax rates, procedure of reporting to the Tax Authorities of Ukraine in case of determination of the Controlling Person status;
  • legal analysis of the grounds for CFC tax exemption in Ukraine;
  • preparation of the company's financial statements in accordance with IFRS and support in filing CFC tax returns with the tax authorities of Ukraine.  

Request a free consultation to find out the details.