On May 23, 2020, the Law of Ukraine No. 466 “On amendments to the Tax Code of Ukraine regarding improvement of tax administration, elimination of technical and logical inconsistencies in tax legislation” (the “Law No. 466”) entered into force.
One of the main innovations of the Law No. 466 is adoption of rules of controlled foreign companies (CFCs), according to which individuals or legal entities-residents of Ukraine will be subject to taxation in relation to the profits of foreign companies that they control, i.e. CFCs.
A CFC is deemed to be any legal entity registered in a foreign state if it is under the control of an individual or legal entity – a resident of Ukraine
Any corporate entity (association) or organization authorized to own assets, have rights and obligations and carry out activities on its own behalf, regardless of founders, participants or ownership form (including trusts, foundations, etc.) can be recognized as a foreign legal entity).
It is deemed that individuals or legal entities-residents of Ukraine exercise control over a foreign company (i.e. they are the controlling person of a CFC) if they:
- Carry out legal control, and namely:
- hold shares in a foreign company totaling to more than 50%, or
- hold shares in a foreign company totaling to more than 10% on the condition that several individuals-residents of Ukraine (and/or legal entities) hold shares, the aggregate amount of which constitutes 50% or more.
2. Carry out actual control, and namely:
- provide instructions of a binding nature to the management bodies of a foreign legal entity;
- conduct negotiations on the conclusion of transactions by a foreign legal entity and agree on the key terms of such transactions, which are subsequently only formally approved by the management bodies of a foreign legal entity;
- have a power of attorney to conclude material transactions on behalf of a foreign legal entity;
- carry out transactions on bank accounts of a foreign legal entity or have the ability to block transactions on such accounts;
- are listed as beneficiaries of a foreign legal entity at the time of opening bank accounts.
In order to determine the tax consequences for Ukrainian beneficiaries in connection with the CFCs rules introduction, VigoLex proposes to analyze the following aspects:
- whether foreign companies are CFCs and the beneficiaries are their controlling persons within the meaning of the Law No. 466;
- share of the controlling person’s ownership in the CFC;
- how and when tax liabilities will arise for the beneficiaries if the CFCs rules are applied;
- prospects of applying exemption from taxation of CFCs profits;
- prospects of re-qualifying passive incomes of a CFC into active incomes;
- adjusted profit of a CFC;
- peculiarities and tax differences that apply in determining a CFC profit in the case of taxation of their adjusted profit;
- administrative requirements that must be observed by beneficiaries if the CFCs rules are applied to them.
VigoLex lawyers believe that with the correct construction of the corporate and tax structure of the business, legal ways can be used to avoid additional tax charges. In this regard, VigoLex recommends that business owners do not neglect checking their foreign companies for compliance with the CFCs rules and start preparing for innovations today.