Answers to the 5 most frequently asked questions
In May 2020 the President of Ukraine signed the law No. 466 stipulating new rules on taxation of controlled foreign companies (“CFC Tax Rules”). CFC Tax Rules aim to ensure tax transparency in Ukraine, de-offshorization and the principle of substance over form. The CFC Tax Rules come into force on 1 January 2021 – supported by introduction of Automatic Exchange of Tax Information (“AEoI”).
1. What are CFC Tax Rules?
The CFC Tax Rules introduce taxation of income of controlled foreign entities (“CFC”) at the hands of Ukrainian controlling persons (individuals or companies) who would be responsible for:
a) Annual reporting and taxation in Ukraine of undistributed CFC’s income pro rate to their stakes in the CFC;
b) Annual reporting of existing CFCs, irrespective of whether there is any reportable income;
c) Reporting of acquisition/alienation of shares in the CFCs or discharging other de facto control, as well as the establishment/liquidation of trusts or other transparent entities.
For Ukrainian purposes, a CFC is a foreign company, including without a legal entity status, trust or partnership, which is under control of a Ukrainian resident (individual or a company).
The control means that a Ukrainian resident:
a) independently holds more than 50% of shares in CFC; or
b) holds more than 25% (10% after 2023) of shares in CFC, provided that together with other Ukrainian residents he/she owns at least 50% of such shares (irrespective of whether these residents are related or not); or
c) solely or jointly with other related Ukrainian residents effectively controls a CFC.
2. Who is and who is not subject to CFC Tax Rules?
CFC Tax Rules are primarily aimed at taxing passive income such as dividends (in monetary or non-monetary form), interest, royalties, income from securities trading, etc. Profits of companies engaged in active trade or business will not be taxed in Ukraine provided that such companies are registered in countries that have a double tax treaty with Ukraine. The controlling person must pay corporate income tax or personal income tax on the income earned by the CFC, even if it has not yet been distributed.
The CFC’s profits will be released from the Ukrainian tax if at least one of the following conditions is met:
a) Ukraine has a double taxation treaty with CFC’s country and either one of the following criteria is satisfied:
– CFC actually pays corporate tax at a rate of 13% or higher; or
– The share of CFC’s passive income does not exceed 50%;
b) the total combined income of all CFCs controlled by Ukrainian
residents does not exceed EUR 2 million per year;
c) CFC is a publicly traded company listed on a recognized stock exchange;
d) CFC is a charitable organization.
However, even if the profits of CFC are exempt from Ukrainian tax under the above rules, the Ukrainian resident is still required to report such CFC and its profits to the tax authorities and confirm that he/she is exempt for the tax. The CFC profits will be included into the tax return of Ukrainian residents and taxed at a rate of 19.5% for individuals (18%+1.5%) and 18% for companies.
3. What are the consequences and penalties?
Generally, penalties under the CFC Tax Rules include fines for the violation of the reporting obligations of Ukrainian controlling persons. Penalties are effective from the 2023 reporting period.
4. When will CFC Tax Rules come into force? Implications of Automatic Exchange of Tax Information? Tax Amnesty?
Controllers have to file CFCs for the first time by April 30, 2021 for individuals and March 1, 2021 for legal entities. CFC Tax Rules will come into force on 1 January 2021. Ukraine is expected to join the automatic exchange of tax information under the Common Reporting Standard (CRS) by the end of 2020. The first exchange of information for 2020 is expected to take place in 2021. It will allow Ukraine tax authorities to automatically obtain information on the bank accounts of foreign entities controlled by Ukrainian residents. Moreover, the law requires Ukrainian banks and financial institutions to report all information they have about foreign entities of Ukrainian residents to the tax authorities. The CFC regime is expected to be supplemented with the contemplated Voluntary Disclosure (Tax amnesty) relief. Under the proposed Tax Amnesty Daft Law, Ukrainian tax residents would be pardoned for tax offences disclosed by such residents voluntarily.
5. How to restructure to be CFC tax compliant?
How to restructure to be CFC tax compliant
From our experience, there are a number of best practice solutions that can be chosen to mitigate the impact of CFC tax laws around the world. Among them can be irrevocable discretionary trusts, securitization companies and investment fund structures, if properly set up. Lindemann Law has more than 20 years of experience of CFC tax advice, in particular with respect to Russia, Ukraine, Israel, Caucasus and Central Asia. It belongs to our core competencies to analyse and advise on the effects of beneficial ownership registers in different countries and the new automatic exchange of tax information with Ukrainian tax authorities. We recommend to review your corporate structure soon to eliminate risks and show potential for tax efficient and compliant restructuring.
Download as PDF
Do you have any questions? – We look forward to hearing from you!
Dr. Maria Ulmann
Tatiana Zakharova
Dr. Oliver Klein
Dr. Alexander Lindemann
Dr. Ariel Sergio Goekmen-Davidoff
Martin Schweikhart
Dr. Sothy Kol-Men
Peter Vrkljan
Jörg Wenger
Thomas E. Meier
Prof. Dr. Iur. Maximilian Werkmüller
