This article will explore the regulatory framework on Controlled Foreign Companies (CFCs), their objectives, and the possibilities for owners. We will examine the risks of Ukrainian tax residency and answer one of the most pressing questions for businesses: when to expect new amendments to the CFC regulations and what they will bring.
The Concept of CFCs in Ukraine
A Controlled Foreign Company is a structure managed by a resident of another country. But how should one handle such a structure to avoid falling under constantly changing laws?
The concept of CFCs did not appear in Ukrainian law by chance. It stems from global practice. In all developed countries, it is assumed that if a person owns a non-resident company not subject to taxation in the owner’s country of residence, they must still declare that company and pay tax on its profits—even if the income has not been physically received.
The state is naturally interested in collecting taxes from a foreign company controlled from its territory. In today’s interconnected world, countries cooperate and exchange financial data. Asset movement is easily traceable, so hiding them is increasingly pointless.
The concept of a Controlled Foreign Company was only recently introduced into Ukrainian legislation. It refers to a legal entity or structure registered in a foreign country but controlled by a Ukrainian resident (individual or legal entity). Anyone with a non-resident company must understand that it is now subject to legal regulation, and therefore, this must be taken seriously.
By law, a CFC is any legal entity registered abroad but controlled by a Ukrainian resident. This broad definition allows lawmakers to interpret the CFC concept freely and prevent tax evasion through legal loopholes. Thus, this law cannot be ignored. Every controlling person must register their company to avoid sanctions and fines for failure to report a CFC.
Controlling Persons
Controlling persons are individuals who own more than 50% of a foreign company or those who own at least 10% provided there are other Ukrainian residents among the shareholders and their total combined share is at least 50%.
There are three criteria for identifying a controlling person. First, ownership of a non-resident company where one is a shareholder or beneficial owner via a trust. Nominee shareholders must disclose share quantities, allowing calculation of ownership percentages.
Second, to prevent circumvention of the 50% threshold by dividing ownership among several persons, another rule applies: a person with over 10% ownership is deemed controlling if other Ukrainian residents also control the company. All such persons must report their involvement.
This second criterion is controversial. For example, a person might not know the other shareholders, or shareholder composition might have changed, making it unclear who holds more than 10%. Such cases require individual legal assessment.
Third, if a person exercises de facto control (alone or jointly with others) over a foreign company, they are considered controlling. Even without shares or beneficial ownership, if a person manages or controls the company, they fall under the CFC law and bear responsibility accordingly.
This third criterion applies, for example, to officials banned from owning non-resident companies or businessmen hiding company ownership behind third parties.
Media investigations that expose such control are now reviewed by legal departments in banks, which are tasked with identifying real beneficial owners. Yet, determining the true controller is often complex when documents list one person and journalists another. This topic is still under discussion at banking conferences and behind the scenes.
What Is a Share in a CFC?
What constitutes ownership in a foreign company? The law defines it as a portion of corporate rights, granting the holder benefits and powers, such as voting rights, profit entitlements, and claim to assets upon liquidation. There are also tax benefits associated with income and liquidation proceeds.
De Facto Control in CFCs
Now that we understand what a CFC is, let’s address a critical issue: de facto control. The Tax Code defines this broadly, significantly limiting ways to avoid liability.
De facto control means influencing key company decisions—asset and profit management, contract signing, and liquidation. It includes giving orders to company management. For example, if someone can call and issue binding instructions, that constitutes legal control.
Negotiating on behalf of a company, even without formal authority, also qualifies as control.
One key legal criterion is a power of attorney for major transactions valid for more than one year. This nuance offers an interpretive loophole—most powers of attorney are issued for a year or less, potentially exempting the holder from being deemed in control. However, executing bank transactions from the company account confirms control and falls under the CFC law.
Another indicator is listing a person as founder or beneficiary when opening a company bank account. Ukrainian banks are now required to update data about the ultimate beneficiary of companies that include foreign entities as shareholders. If the listed nominee is not the true owner, banks may request trust declarations or conduct in-depth reviews to identify the real controller.
Banks use directories of known nominee shareholders. When someone is listed as a shareholder in dozens of companies, it’s hard to argue they are the actual owner. In such cases, Ukrainian residents are often listed instead. This information is now available to tax authorities, and failure to report CFCs may result in fines.
Exceptions to de facto control exist. For example, individuals managing assets under a power of attorney—lawyers, auditors, trust managers, protectors, guarantors, insurers—are exempt. The law also curiously lists “enforcers,” a vague term that raises interpretive issues. A Google search suggests “bar bouncer,” which obviously does not fit in this legal context, creating room for manipulation.
Thus, every law-abiding owner of a non-resident company must now report it. First, they must notify their resident legal structure. Then, they must pay tax on the income earned by that entity. The Tax Code details the procedures and deadlines for doing so.
There are two tax options for individuals:
- Standard rate: 18% tax.
- Reduced rate: 9%, plus a military levy.
There are also two taxation strategies:
- Pay taxes on hidden ownership, bypassing the beneficial owner.
- Or formally declare yourself as a shareholder and pay 10.5% tax on dividends (9% + military levy).
What Income Is Not Taxable?
Not all CFC income is taxable. This is one of the most discussed topics in international company taxation. Let’s look at the available exemptions:
- CFC profits are not taxable if Ukraine has a double tax treaty with the relevant jurisdiction and one of two conditions is met. First: the CFC pays effective profit tax at a rate not less than 18%, or the shortfall is within 5 percentage points. (Cyprus, for example, falls slightly below this threshold.) Second: the CFC’s passive income does not exceed 50% of total income. This is to prevent abuse through “wallet” companies that generate income solely from passive sources (stocks, bonds, funds, etc.).
- CFC profits are not taxable if the total income of all a person’s CFCs from all sources does not exceed €2 million by the end of the reporting period. This raises the question: does €2 million refer to income or profit? Income might be considered total turnover, while profit is income minus expenses.
The general formula for taxable profit is: income minus expenses. The result is then taxed. However, international accounting standards sometimes equate income with profit, so clarification is still being debated.
- If a company’s shares are publicly traded on recognized stock exchanges, its profits are not subject to tax. The term “recognized exchanges” is not legally defined but implies that the organization holds a relevant license.
- Another exemption applies to CFCs involving charitable participants. These companies do not distribute profits among shareholders but instead transfer funds to NGOs, which allocate them for specific needs.
Sanctions for CFC Law Violations
If a controlling person fails to report their CFC, they face a fine of 100 subsistence minimums. As of January 1, 2020, this is UAH 210,000.
Thus, penalties should make CFC owners think carefully. There is a long list of sanctions for failure to notify and pay taxes. Avoiding liability is nearly impossible under these provisions.
Preferential Liquidation of CFCs
When an individual realizes they must file reports and pay taxes on each of their foreign companies, they may consider liquidating those assets. Legal complexities and unanswered questions often lead to this decision. A preferential liquidation rule previously allowed the first liquidation (before 30.06.2020) to proceed without including the assets received during liquidation in taxable income.
