Law on BEPS: Controlled foreign company (“CFC”) and place of effective management

CFC rules in Ukraine will become effective as of January 1, 2021. What is there to know about them?

CFC and Controlling entity

A Controlled Foreign Company is:

any non-resident legal entity or foreign transparent entity (including partnerships, trusts, foundations, etc.), controlled by an individual resident or legal entity resident in Ukraine.

Controlling entities are:

• Entity holding a share of more than 50% in foreign company
• Entity holding a share of more than 10% in foreign company (25% criteria applies for the period 2021-2022), whereas residents of Ukraine altogether hold a share of 50% and more in foreign company
• Entity exercising de facto control (even if such person is not a legal owner) of foreign company
• Founder of trust (except irrevocable discretional trust), owner of share in other unincorporated entity
• Entity that has a right to claim income or to claim assets in the event of dissolution, or exercises actual control over unincorporated entity

Taxation of Controlled Foreign Company

Object of taxation

The adjusted annual profit of CFC, which was not declared as income of controlling entity, shall be included to the annual taxable income of the controlling entity and shall be taxable at the following effective tax rates:

• 19,5% for individuals
• 18% for legal entities

Profit of CFC is not included to the annual taxable profit, if:

• Profit of all CFCs of one controlling entity does not exceed EUR 2 million
• CFC is a public company listed on an authorized stock exchange or
• CFC conducts charity activities and does not make any distributions

CFC is exempt from taxation if:

• There is a valid DTT between Ukraine and country of CFC`s residency and
  1. CFC is effectively taxed at a rate that is no lower than 13% or
  2. CFC receives 50% and less of passive income

Income is considered as active, if the following conditions are simultaneously met:

• Income is considered as active, if the following conditions are simultaneously met:
• CFC has “substance” and performs respective functions, bares risks and holds assets used in performing its functions

Reporting requirements for CFC

• CFC report shall be submitted together with the declaration on personal income tax / corporate income tax declaration and annual financial statements of the CFC
• Notification of tax authorities regarding acquisition of share, start of execution of the actual control, incorporation, alienation of share in CFC shall be submitted within 60 days from the date of such event

Penalties

Failure to submit report on CFC 100 subsistence incomes for working people (“SIWP”) (as of 01.01.2020 – 210 200 UAH)

Failure to submit CFC report on time 1 SIWP for each day of delay, but no more than 50 SIWP (as of 01.01.2020 – 105 100 UAH)

Omission of CFC in CFC report 3% of CFC’s profit or 25% of corrected income of CFC (no more than 1 000 SIWP, as of 01.01.2020 – 2 102 000 UAH)

Failure to notify tax authorities on acquisition or start of actual control within a specified period 300 SIWP (as of 2020 – 630 600 UAH)

Failure to submit documentation at the request of tax authorities 3% of CFC profit, but no more than 1 000 SIWP (as of 2020 – 2 102 000 UAH).

Important: Fines and penalties for violations with respect to calculation of CFC’s profit do not apply to 2021-2022 reporting years.

Reporting requirements will apply as of January 1, 2021.

Place of effective management

Law on BEPS introduces place of effective management and control rules.

Foreign companies effectively managed from Ukraine are taxpayers of corporate profit tax in Ukraine.

Foreign company can voluntarily register with Ukrainian tax authorities as a taxpayer of corporate profit tax as well.

Foreign entity registered as a taxpayer in Ukraine:

• Is not a CFC for Ukrainian tax purposes and
• Ukrainian withholding tax does not apply to income of such entity derived from a Ukrainian source

The provision on place of effective management will apply as of January 1, 2021.