From the beginning of 2021, the rules of taxation of controlled foreign companies (hereinafter – CFC) were to become effective. It should be recalled that the CFC was any legal entity registered in a foreign state or territory that is recognized as such (ie any, not just offshore), which is under the control of a natural person resident in Ukraine or a legal entity resident in Ukraine. The list of cases in which a resident of Ukraine exercises control over the CFC is prescribed by the Tax Code of Ukraine – the Tax Code). What you need to know about CFC in 2021 – below.
Postponement
It was planned that from the beginning of 2021 a resident of Ukraine (both natural and legal entities) who controls a foreign entity, would have to become a payer of CFC income tax. In addition, this entity (the resident who controls the CFC) was required to submit the Report on CFC to the controllers, as well as the Notice of Acquisition or Termination of Participation in CFC. The rules of income taxation of CFC are established by Art. 39 of the Tax Code for the case when the controlling person is a legal entity, and for the case when the controlling person is a natural entity –item 177.13 of the Tax Code.
The introduction of CFC tax rules from the beginning of 2021, according to many experts, was premature. Therefore, Law of Ukraine “On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine to Ensure the Collection of Data and Information Required for the Declaration of Certain Objects of Taxation” No. 1117-IX of December 7, 2020 (hereinafter – Law No. 1117) postponed the entry into force of the rules of taxation of the CFC for a year until January 1, 2022 (ie the rules of Art. 39 and item 177.13 of the Tax Code will come into force only from the beginning of next year).
Therefore, it is not yet necessary to submit the Report on CFC or Notice of Acquisition or Termination of Participation in CFC in 2021.
In addition, Law No. 1117 prescribed special rules for the entry into force of the rules of taxation of the CFC. Thus, in particular, the first reporting (tax) year for the CFC report is 2022 (if the reporting year does not correspond to the calendar year, the reporting period begins in 2022). That is, the Report on CFC will have to be submitted for the first time in 2023 (item 54, section 10, chapter XX of the Tax Code).
Legislators allow a supervisor to file the Report on CFC for 2022 and beyond. They give the right to submit such a report to the supervisory authority at the same time as the submission of the annual declaration of property and income (this applies to individuals who are controlling persons) or tax return on corporate income tax (this applies to legal entities) until 2023 (ie in 2024 year).
Those who choose the method of submitting the Report on CFC for 2022 during the reporting for 2023 should remember that it will be necessary to include the data of the adjusted profit of the controlled foreign company subject to taxation in Ukraine indicated in such report in the indicators of the relevant declarations for 2023. At the same time, penalties and/or fines do not apply.
In addition, item 54, section 10, chapter XX of the Tax Code provides that:
1) penalties and fines for violations committed during the determination and calculation of the profit of a controlled foreign company are not applied according to the results of 2022–2023 reporting (tax) years;
2) according to the results of 2022–2023 reporting (tax) years, administrative and criminal liability for any violations related to the CFC is not applied to the taxpayers and their officials. In this regard, information and/or documents received by the controlling authority for the results of 2022-2023 reporting (tax) years:
a) is information with limited access that cannot be requested and/or transmitted to law enforcement agencies at their request or within the procedures provided by the Criminal Procedure Code of Ukraine;
b) cannot be considered evidence in criminal proceedings within the meaning of Art. 84 of the Criminal Procedure Code of Ukraine.
So, for at least a year, you can mention the CFC, just not to forget, but do not worry about their taxation.
Liquidation of CFC
If a natural entity does not wish to continue to be a controlling person due to the introduction of CFC taxation, item 14, section 1, chapter XX of the Tax Code gives it the right to liquidate the CFC in 2021 without tax consequences.
Thus, in accordance with this item, the income of a natural entity liquidating the CFC temporarily in 2020-2021 does not include income in the form of income in cash and/or other property, received by a taxpayer as a result of liquidation (termination) of a foreign legal entity or foreign entity without legal entity status, if such an individual is:
1) a shareholder (participant, partner, shareholder, founder, controlling person) of a foreign legal entity or a foreign entity without the status of a legal entity in case of compliance with the following conditions:
a) the procedure of liquidation (termination) of a foreign legal entity or a foreign entity without the status of a legal entity was initiated not earlier than January 1, 2020 and completed not later than December 31, 2021;
b) the taxpayer has submitted to the controlling body simultaneously with the tax return for the relevant tax (reporting) year:
- an application made in any form for exemption of such income from taxation, indicating the characteristics of the received property and liquidated (terminated) foreign legal entity or foreign entity without the status of a legal entity;
- documents containing information on the value of the property received, in accordance with the financial statements of a foreign legal entity or a foreign entity without the status of a legal entity, prepared in accordance with international financial reporting standards, on the date of the decision on distribution of property as payment of income in connection with liquidation (termination) of a foreign legal entity; foreign entity without the status of a legal entity;
c) a foreign legal entity or a foreign entity without the status of a legal entity was established on the basis of a legal act or law of a foreign state (territory) no later than May 23, 2020 or was registered no later than May 23, 2020 in accordance with the legislation of a foreign state (territory) if in accordance with the legislation of such foreign state (territory), regulatory requirements and/or documents governing the activities (personal law) of such foreign legal entity or foreign entity without the status of legal entity, such person (entity) is subject to registration in the relevant state (territory) ;
2) the ultimate beneficial owner (controller) from the nominal holder (nominal owner). At the same time, a natural person, in order not to tax such income, in addition to the information and documents that exempt this income from taxation, and listed above, must provide documents confirming receipt of such income from the nominal holder (nominal owner) in connection with the liquidation (termination) of a foreign legal entity or a foreign entity without the status of a legal entity.
