In recent years, Ukrainian entrepreneurs are increasingly paying attention to the opportunities offered by the American market, especially in the area of online sales through marketplaces.
However, going international requires not only an understanding of the peculiarities of doing business abroad, but also careful compliance with Ukrainian tax legislation, especially with regard to controlled foreign companies (CFCs).
What is CFC and why it is important
Who is considered a controlling person
Under Ukrainian law, a Ukrainian resident (individual or legal entity) is recognized as a controlling person:
- Owns an interest of 50% or more in a foreign company.
- Owns a stake of 10% or more, provided that the aggregate stake of all Ukrainian residents in this company is 50% or more.
- Exercises actual control over the company, regardless of formal shareholding.
For example, if a Ukrainian entrepreneur owns 15% of the shares of an American company and the remaining 85% are owned by other Ukrainian residents, he is considered a controlling person.
Responsibilities of supervisory persons
Controlling persons are required to:
- Notification of ownership of a CFC: Within 60 days of the acquisition, change or loss of an interest in a foreign company, the Ukrainian tax authorities must be notified.
- Filing of CEC reports: Annually file a report on the activities of a CEC together with an income tax return.
Failure to fulfill these responsibilities can result in significant fines and other penalties.
CFC reporting deadlines in 2025
In 2025, controlling persons must file CFC reports for the 2024 reporting year. The deadlines for filing depend on the status of the controlling person:
- Individuals: By May 1, 2025, along with the annual income tax return.
- Legal entities: By March 1, 2025 together with the income tax return.
It is important to note that if a CFC's financial year does not coincide with a calendar year, it is possible to file abbreviated reporting followed by full information.
Forms and content of reporting
The CFC report shall contain:
- Information about the company: name, jurisdiction, legal form.
- Data on the ownership structure and the size of the controlling person's share.
- Financial indicators: revenues, expenses, profits, taxes.
- Information on transactions with related parties.
The report is submitted electronically through the taxpayer's personal office using an electronic digital signature.
CFC Profits Taxation
Profits of a controlled foreign company (CFC) are subject to taxation in Ukraine at the rate of 18%. However, there are exceptions to avoid double taxation:
- Payment of tax abroad: If a CFC has paid income tax in its jurisdiction at a rate not lower than 13%, the controlling person may reduce the amount of tax payable in Ukraine by the amount of tax paid abroad.
- Public companies: If a CFC is a public company listed on recognized stock exchanges, its profits may be exempt from taxation in Ukraine.
It is important to note that supporting documents, such as the CFC's financial statements and certificates of taxes paid, must be provided in order for these exemptions to apply.
Possible fines and penalties
Failure to comply with CFC reporting and tax requirements can result in significant penalties:
- Failure to submit a CFC notification: Penalty in the amount of 100 subsistence minimums for able-bodied persons, which is UAH 268,400 as of January 1, 2025.
- Failure to submit a CFC report on time: Penalty in the amount of 1 subsistence minimum for each day of delay, but not more than 50 subsistence minimums.
- Failure to reflect information on CFC in the report: Penalty of 3% of the amount of CFC's income or 25% of CFC's adjusted profit for the relevant year not reflected in the report.
In addition, there may be additional sanctions, including administrative and criminal liability, depending on the nature and extent of the violation.
Practical examples
Let us consider several situations that Ukrainian entrepreneurs doing business through American marketplaces may encounter:
- Example 1: An entrepreneur owns a 60% stake in a US company selling goods on Amazon. He must notify the Ukrainian tax authorities of his ownership of a CFC within 60 days of acquiring the stake and file annual CFC reporting.
- Example 2: A group of Ukrainian residents owns in aggregate 55% of the shares of a foreign company, each of them has a stake of less than 10%. In this case, each of them is considered a controlling person and is obliged to comply with CFC reporting and taxation requirements.
Recommendations on risk minimization
To minimize the risks associated with owning and operating a CFC, it is recommended that:
- Timely notification: Notify the tax authorities of the acquisition, change or loss of an interest in a CFC within the prescribed time limits.
- Correct reporting: Submit annually a full and accurate report on the CFC's activities, including financial indicators and information on related party transactions.
- Documentary evidence: Retain and make available upon request all necessary documents confirming the payment of taxes abroad and the CFC's eligibility for tax exemption.
- Consult with professionals: Contact qualified tax advisors for up-to-date information and compliance assistance.
Conclusion
Doing business through foreign companies opens up a wide range of opportunities for Ukrainian entrepreneurs, but requires a careful approach to tax accounting and reporting. Compliance with the rules established for controlled foreign companies will help avoid fines and sanctions and optimize the tax burden.
Turning to professionals in the field of tax consulting will help to ensure correct fulfillment of all legal requirements and focus on business development. TaxFreeCorp is ready to provide a full range of support and consulting services in matters related to CFCs, ensuring reliable support for your business in the international arena.