To submit or not to submit the CFC Report: responsibility in wartime?

Under the conditions of martial law in Ukraine, business faces new challenges, particularly in the field of tax regulation. Controlled foreign companies (CFCs) remain an important part of the legislation and failure to comply with reporting requirements can lead to serious liability in the form of fines. However, in May 2024, the Verkhovna Rada of Ukraine passed a decision on the temporary “cancellation” of responsibility for violations related to the reporting of the CFC and other duties of the CFC for the period of martial law, which was introduced in February 2022, and for six months after its completion (Law of Ukraine No. 3706-IX).

Such changes to the legislation of Ukraine significantly affected the obligations of business in relation to controlled foreign companies (CFCs). The decision of the Verkhovna Rada not to apply responsibility for violations in the reporting of the CFC during martial law, at first glance, creates the impression that the submission of CFC Reports can be completely forgotten. Some entrepreneurs have come to this conclusion, mistakenly believing that these requirements are no longer mandatory.

But is it really so? Is it possible to completely ignore the CFC Report during this period and avoid fines? Let’s find out in detail: which obligations are temporarily removed, whether to expect the return of fines for the past period, and what is important to know in order to avoid problems in the future.

Will there be fines during martial law for CFC Reports?

Failure to comply with legal requirements for controlled foreign companies (CFCs) can result in significant fines. According to Ukrainian legislation, fines for non-submission or late submission of the CFC Report range from 100 to 1000 subsistence minimums. In particular:

• Failure to submit the Report on CFC: a fine in the amount of 100 units of the subsistence minimum (*302,800 UAH).
• Untimely submission of the Report: 1 amount of the subsistence minimum for each day of delay, but not more than 50 amounts of the subsistence minimum (*up to UAH 151,400).
• Failure to submit a report within 30 days after the deadline: a fine in the amount of 5 subsistence minimums for each day of non-submission, but not more than 300 subsistence minimums (*up to UAH 908,400).
• Non-disclosure of information on CFC in the Report: a fine in the amount of 3% of the amount of undisclosed transactions or 25% of the undisclosed amount of adjusted profit, but not more than 1,000 units of the subsistence minimum (*up to UAH 3,028,000).
• Failure to submit a notification on the acquisition/sale of a share in CFC: a fine in the amount of 300 times the subsistence minimum (*908,400 UAH).

*The amounts of fines are calculated taking into account the subsistence minimum for an able-bodied person as of January 2024 – UAH 3,028. It is also worth considering that the size of the subsistence minimum increases every year, and therefore the amounts of the above-mentioned fines will also increase every year.

The position of the State Tax Service of Ukraine regarding fines and their suspension

As you already know, with the adoption of the above-mentioned amendments, the legislators decided temporarily, for the period of martial law and six months after it, not to apply all the fines mentioned above. This decision was taken ostensibly to support business in wartime conditions, however, it is important to understand that the obligation to submit CFC reports and CFC reports has not been canceled and these articles of the Tax Code are still in effect.

So, temporary non-application of liability for non-submission of reports does not mean that their submission is not necessary. The Law does not specify that entrepreneurs can ignore reports or notices about CFC, moreover – it remains their duty. After the end of martial law, the fines will become relevant again and any CFC violation committed after January 1, 2022 is more likely to be subject to a penalty (fine).

You ask why the word “more likely” is present in the text, are there any doubts? This is precisely because the State Tax Service of Ukraine (STS) is beset by confusion regarding possible fines for non-filing of controlled foreign companies (CFCs) during martial law. When asked whether fines will be imposed for missed reporting deadlines or non-submission STS of Ukraine employees just throw up their hands, noting that the legislation on deferrals is written so ambiguously that it can lead to different interpretations – both in favor of taxpayers and against them. After adopting the new amendments, the STS immediately sent a request to the Ministry of Finance, asking for clarification on further actions. For almost 5 months from the date of the request, the Ministry of Finance also could not decide which position to support. However, ahead of the October 18, 2024 deadline for submitting full CFC reports, the STS of Ukraine reported that the Ministry of Finance had finally given its response and still supported their position on the application of fines for CFC-related violations. Currently, the position of the STS of Ukraine and the Ministry of Finance is as follows: fines for violations will be applied six months after the end of martial law. This applies to all violations of the CFC that could have occurred since 2022, when martial law began.

Of course, we can expect anything from our tax officials and even that over time they will put forward a different and even opposite position (in practice, this was already the case during the submission of the first reports of the CIC, when each subsequent explanation from the STS contradicted the previous one), but, in most cases, all these decisions, unfortunately, are not in favor of taxpayers.

Therefore, taking into account the realities of our country and possible surprises from the control authorities, Azola Legal Services recommends all control persons of the CFC to submit reports on time and not to hope for gifts of fate from the STS of Ukraine. After the end of the war, the authorities will not miss the opportunity to fill their coffers, taking advantage of the imperfect legislation on postponement. The decision is always up to you, but you shouldn’t risk it by counting on the uncertainty of the law.

Is it possible to hide my CFC without reporting at all?

The answer to this question is quite simple and unequivocal – no. If you do not submit the CFC Report at all and expect that your CFC will not be found out, then it is worth remembering that the tax authorities, through the mechanisms of the annual automatic exchange of financial information, CRS will see your CFC abroad and will usually receive a “letter of happiness” about the imposition of a huge fine (more than UAH 300,000) at least after the end of martial law and 6 months after it. After all, the tax authorities of Ukraine already today collect all information about foreign controlled structures, they will be able to easily identify controlled foreign companies through CRS exchange mechanisms and from open sources.

For example, already in the period from 01.01.2022 to 01.09.2024, the STS of Ukraine received 21,817 full Reports on CFC and 10,354 Reports in abbreviated form, and also recorded that more than 2,000 reports were submitted after the deadline, that is, in violation of the deadline. Thanks to the systematic analysis of reporting, international exchange of information and the use of open sources, the STS of Ukraine quickly finds controllers who avoid submitting reports or violate established deadlines. Especially considering that as of September 30, 2024, the STS of Ukraine successfully carried out the first international exchange of information with more than 50 partner countries. This means that the STS of Ukraine received information about Ukrainian controllers from more than 50 foreign jurisdictions, and information about Ukrainian residents was sent to more than 30 foreign jurisdictions, so this is additional material for identifying new CFCs and their controllers.

That is why it is not worth ignoring the reports, counting on some kind of “cancellation” or amnesty, because as a result you can receive a fine. The only thing that can be hoped for, though, is probably more expectation than reality, that parliamentarians will make further changes to the CFC legislation in the future, which will somehow mitigate responsibility or at least be clearly regulated. But at the moment we have what we have: imperfect and “crooked” legislation on CFC, as well as traffic police who do not know whether to fine or not.

And one more important nuance, why it is necessary to submit reports to CFC on time. The new edition of the Tax Code of Ukraine states that the statute of limitations for CFC cases starts from the date of submission of the CFC Report. This means that the earlier, on time, the CFC Report is submitted, the fewer risks will arise after the resumption of fines, if, for example, there were any mistakes made in the Report or the submission deadline was missed. Thus, entrepreneurs should take care to fulfill their obligations on time, meeting the deadlines, in order to avoid possible problems in the future.

Attention: the second stage of submitting the KIK Report for 2023 has begun

So, we have already decided: It is better to submit reports on controlled foreign companies (CFCs) on time, despite the temporary “bumps” from legislators regarding the postponement of fines. So, the second stage of reporting is currently underway – the submission of Full Reports of the CFC for the fiscal year 2023, which must be completed by December 31, 2024. This applies only to those CFC controllers who submitted the CFC Summary Report in May 2024. Those who submitted the 2023 Full CFC Report in May of this year have already fulfilled their obligation for the current year and can skip this section of the article.

We remind you that the Abridged Report of the CFC is submitted in those cases when the controlling person cannot timely prepare the full financial statements of the CFC due to different reporting deadlines in another jurisdiction or calculate the adjusted profit of the company before the deadline for submitting a declaration of assets and income or a tax return on the profit of enterprises. This is effectively an interim report, allowing additional time to prepare a full report, but its submission does not relieve the obligation to complete reporting by the end of the year.

Accordingly, the legislation obliges all those who submitted an abbreviated report to submit a full CFC report by the end of the same calendar year. The deadline for submitting the Full Report of the CFC for 2023 is December 31, 2024. The full report contains more than 30 points that require detailed filling. Special attention is paid to the financial results of CFC, the company’s operations and the income that may be subject to taxation in Ukraine. It is also necessary to carefully calculate the taxable income and find out whether there is an opportunity to avoid double taxation.

The report is submitted in electronic form through the taxpayer’s electronic account. For submission, a qualified electronic signature is required, as well as the submission of additional documents confirming the financial indicators of the CFC.

It is important not to postpone the preparation of the Full Report of the CFC until the last moment, because this process requires detailed processing, the involvement of accountants and translators for preparation. Thus, the preparation of the report takes quite a long time, and it is important to take this into account in order to have time to submit the report before the deadline.

Conclusions: What is important to know about CFC reporting during martial law?

So, let’s summarize the key points regarding the reporting of controlled foreign companies (CFCs) to the country under martial law:

1. Reporting obligations of the CFC have not been canceled. Despite the postponement of fines, submission of reports remains mandatory for all controlling persons. If you have controlled foreign companies, it is necessary to meet the established deadlines and submit reports on time to avoid problems in the future.
2. Fines are not canceled, but only postponed. Lawmakers temporarily suspended the application of fines for the period of martial law and six months after its end. And the STS of Ukraine and the Ministry of Finance now stand by the fact that all fines provided for by the Tax Code will be imposed after this period for any violations committed from January 1, 2022. You should not count on amnesty.
3. The Tax Office actively monitors and collects data on violators. The automatic exchange of tax information through the CRS (Common Reporting Standard) system has already started. This means that the tax service of Ukraine will receive information about all foreign assets of Ukrainians, including CFCs, and will be able to apply fines for violations of reporting requirements. Therefore, it is a bad practice to ignore your obligations under CFC.
4. The second stage of reporting on CFC. If you submitted the 2023 Summary Report of the CFC in May 2024, you must now prepare and submit the Full CFC Report by December 31, 2024 with attachments.

Given the complexity of the reporting process and serious consequences for non-compliance, we advise you not to postpone the preparation of documents until the last days. Azola Legal Services provides qualified assistance in CFC reporting and can accompany you at every stage to ensure timely and correct fulfillment of all obligations. Contact us for advice and support today!