Controlled foreign corporation: conditions for recognition and features of notification to regulatory authorities

The company decided to scale its business and attracted foreign partners and investors to do so. Will such a company be recognized as a controlled foreign corporation (CFC) and what will be the specifics of its further activities? Read below.

Recognition of a foreign company as CFC

A controlled foreign corporation in accordance with item 39² .1.1 of the Tax Code of Ukraine (hereinafter – the Tax Code) is recognized as any legal entity registered in a foreign state or territory, which is recognized as being under the control of an individual resident of Ukraine or a legal entity resident of Ukraine in accordance with the rules specified by the Tax Code. Thus, a foreign company is recognized as a CFC if the individual or legal entity resident of Ukraine (the controlling entity):

• owns a stake of more than 50% in a foreign legal entity;
• owns a stake in a foreign legal entity in the amount of more than 10%, provided that several individuals - residents of Ukraine and/or legal entities - residents of Ukraine own shares in a foreign legal entity, the size of which in aggregate is 50 percent or more;
• individually or together with other related persons, residents of Ukraine, exercises actual control over a foreign legal entity.

In accordance with item 54, section 10, chapter 20 “Transitional provisions” of the Tax Code of Ukraine , clause “b” of item 39².1.2 of the Tax Code of Ukraine for the 2022 – 2023 reporting (tax) years must be applied in the following wording:

"b) owns a share in a foreign legal entity of 25 percent or more, provided that several individuals - residents of Ukraine and/or legal entities - residents of Ukraine own shares in a foreign legal entity, the size of which in aggregate is 50 percent or more, or."

Rules for reporting to regulatory authorities

Clause 39² .5.5 of the Tax Code, in particular, establishes that an individual resident of Ukraine is obliged to notify the regulatory authority of:

• each direct or indirect acquisition of a share in a foreign legal entity or the beginning of the exercise of actual control over a foreign legal entity, which leads to the recognition of such an individual as a controlling person in accordance with the requirements of Article 39² of the Tax Code;
• establishment, creation or acquisition of property rights to a share in the assets, income or profits of an entity without the status of a legal entity;
• each alienation of a share in a foreign legal entity or termination of actual control over a foreign legal entity, which leads to the loss of recognition of such an individual as a controlling person in accordance with the requirements of Article 39² of the Tax Code;
• liquidation or alienation of property rights to a share in the assets, income or profits of an entity without the status of a legal entity.

The notification must be sent to the regulatory authority within 60 days from the date of such acquisition (beginning of actual control) or disposal (termination of actual control).

The form of the Notification of the acquisition (beginning of actual control) or alienation of a share (termination of actual control) by a resident in a foreign legal entity or property rights to a share in the assets, income or profit of an entity without the status of a legal entity was approved by Order of the Ministry of Finance of Ukraine No. 512 of September 22, 2021.