Controlled Foreign Companies (CFCs)

The modern world connects various countries and jurisdictions through international business and investments, offering incredible opportunities but also creating new challenges for the tax systems of each state. In this context, the concept of “Controlled Foreign Companies” (CFCs) becomes an important element in combating tax evasion and ensuring fairness in taxation.

Controlled Foreign Companies is a term that gains special significance in the context of Ukrainian tax legislation following its integration into the European legal space. However, the concept of CFCs is relevant in other countries worldwide, where it is used to ensure tax transparency and combat tax avoidance.

What are CFCs and who falls under the law

According to Ukrainian legislation, a Controlled Foreign Company (CFC) is any legal entity and, in some cases, a non-legal entity entity (partnership, funds) registered in any country other than Ukraine and is controlled by a citizen or tax resident of Ukraine.

The controlling party can be either a physical or legal resident of Ukraine. There are slightly different criteria for these categories:

• A physical resident of Ukraine who is recognized as the ultimate beneficial owner (controller) of a controlled foreign company.
• A legal entity resident of Ukraine that is a direct or indirect owner (controller) of a controlled foreign company.

It is also necessary to meet one of the following conditions:

• The entity owns more than 50% in a foreign legal entity;
• It owns more than 10%, and additionally, 40% or more is owned by physical or legal entities resident in Ukraine;
• It jointly with other entities exercises actual control over the activities of a foreign legal entity.

Filing a CFC Notification

According to Ukrainian legislation, individuals falling under the definition of a controlling party of a CFC are required to submit a notification of the presence of a CFC within a specified period.

Filing CFC notifications occurs in the following cases:

• Registration or creation of a foreign company or non-legal entity.
• Acquisition of property rights to a share in the assets, income, or profits of a foreign company.
• Liquidation of a foreign company.
• Acquisition, receipt as a gift, sale, or gift of a part of a foreign company.
• Acquisition of the right to control or cessation of control over a foreign company.

A CFC notification is submitted electronically through the taxpayer’s online account. Each such company must have its own notification. The document should include all the necessary information, including details about the CFC, the controlling party, and any changes in status if applicable.

The obligation to submit the notification must be fulfilled within 60 days from the date of occurrence, change, or cessation of direct (indirect) control over the CFC. For companies registered between March 7, 2022, and November 25, 2022, this deadline expired on January 23, 2023. For other cases, the submission deadline is determined based on the date of the event requiring notification.

Preparing CFC Reports

CFC reports must contain complete and accurate information about these companies and controlling parties. The key information that should be included in the reports includes the following:

• The name and registration details of the CFC.
• Information about the controlling party (individual or legal entity).
• Information about the ownership structure of the CFC.
• Changes in the status of the CFC, if applicable.

Preparing CFC reports requires strict compliance with the legislated procedure. Filing deadlines may vary depending on specific circumstances, but typically, they need to be prepared and submitted annually.

Submission of reports can be done electronically through the taxpayer’s online account or other means as provided by law. Failure to comply with CFC reporting requirements or failure to submit them within the specified deadlines may result in liability before tax authorities.

According to Ukrainian legislation, violation of CFC reporting requirements can lead to fines. The amount of the fine may vary depending on the circumstances of the violation and can be a significant sum of money. It is important to adhere to the prescribed deadlines and requirements for the preparation and submission of CFC reports to avoid unpleasant consequences and fines for non-compliance.

If you need consultation on Controlled Foreign Companies (CFCs) and assistance with submitting notifications and preparing CFC reports, feel free to contact the experts at Dextralaw legal firm. Our experts in tax and corporate law are ready to provide the necessary legal support and consultations to ensure compliance with all legal requirements and optimal solutions for your business.