Rules for filing CFC reports in 2024

For several years the application of the legislation on the reporting on controlled foreign companies (“CFC”), as well as taxation of its profit, has been an urgent issue for Ukrainian business. These requirements are the consequence of the implementation of the BEPS plan, so they need to be given maximum attention. Submission of reports, as well as the correctness of information on it, are not just moments that will be controlled. Failure to comply with these rules may entail the application of quite strict financial sanctions, that will cause the loss of the business working capital.

It should be noted that the rules for CFC reports are quite flexible, for example they (1) contain provisions for the submission of an adjusted report (2) provide transitional periods that are not subject to sanctions, and (3) provide an opportunity to defer the filing of CFC reports.

We separately recall that the filing of reports must be preceded by a notification to the tax authorities about the fact itself of the acquisition / alienation of a CFC share. But in this article, we focus exclusively on the main aspects of reporting for controlled foreign companies. Personal consulting services for CFCs will help to correctly take into account the various individual features of the preparation of CFC reports that may be.

Who is it necessary to submit a CFC report?

The obligation to submit CFC reports arises for residents of Ukraine in the case of holding shares in a commercial enterprise abroad, namely, a CFC, that can be recognized on the following:

1. Any legal entity that is incorporated in another jurisdiction or territory that is recognized as such.
2. A foreign entity without the status of a legal entity, formed on the basis of an agreement or registered in the territory of a foreign jurisdiction. An important condition is that such an entity has the right to conduct commercial activities in the interests of its partners, participants or other beneficiaries. These may be, for example, partnerships, foundations, trusts and other similar organizations. An approximate list of such forms can be found in the Decree of the Cabinet of Ministers of Ukraine dated July 4, 2017 No. 480. For example, the new CFC requirements will apply to English Limited Liability Partnerships.

A CFC report must be submitted by a Ukrainian resident (individual or legal entity) who is a direct or indirect owner (controller) of a CFC, namely:

• owns a 50%+ shares in CFC; or
• owns a 10%+ shares in a CFC, subject to joint ownership of a 50%+ shares with other residents of Ukraine (individuals and legal entities); or
• exercise actual control over a non-resident CFC alone or jointly with other residents of Ukraine, while having the right to exercise decisive or significant influence on the decisions of such a CFC in relation to (1) entering into contracts, (2) disposing of assets and/or profits, (3) liquidating a CFC.

A CFC report must be submitted even for “dormant” companies. If you have grounds for exempting income from taxation, then the report is submitted even in this case. The negative profit also does not remove the issue of preparing a CFC report from the agenda. We also note that CFC reports are submitted separately for each foreign company.

CFC reporting: terms, periods and main forms

The general rules define that the CFC report is submitted together with the annual income tax return of an individual or a tax return on the profit of a legal entity for the reporting period – until May 1 or March 1 of the next year, respectively. The CFC report is filled out in accordance with the Order of the Ministry of Finance of Ukraine No. 254 dated August 25, 2022. The order approved the forms of reports, as well as the procedure for filling them out.

It was necessary to submit the first CFC report at the beginning of 2023 if the resident was the controller as of December 31, 2022. But the transitional period allows you to submit a full CFC report for 2022 in 2024, along with tax returns for 2023. In 2024, a CFC report for 2023 will also need to be submitted additionally. It can be full or short (it depends on whether the reporting period in the country of registration of the CFC coincides with the calendar year or not).

The key point in terms of preparing a CFC report is the determination of the period for calculating financial indicators. The standard reporting period in this case is the calendar year or another reporting period that ends during the calendar year.

Tax legislation provides for two versions of reports (full and short) just for situations where the financial year in another jurisdiction does not coincide with the calendar year. In this case, the controller of the CFC apparently cannot display the necessary information on his foreign company. Therefore, a short CFC report is first submitted with the annual income declaration of the individual/tax declaration of the legal entity on income. Further, the controller is already obliged to collect the required information by the end of the calendar year and submit a full report with the relevant financial indicators.

For example, if the reporting (financial, tax) period coincides with the calendar year, then in 2024, by default, it will be necessary to reflect the financial results of the CFC from January 1 to December 31, 2023. This CFC report will have to be submitted by individuals by May 1, 2024, and by legal entities by March 1, 2024.

If we are talking about a company from a jurisdiction in which the reporting period does not coincide with the calendar year, then for the purposes of the CFC report, the financial period that ends during the calendar year will be taken. For example, in England the reporting period starts on April 6 of the current year and ends on April 5 of the next year. Therefore, the CFC report, which will be submitted in 2024, will have to reflect the financial results obtained for the period from April 5, 2022 to April 6, 2023 (CFC reporting for 2022) and they will be submitted together with the tax reporting of a resident of Ukraine for 2023. Together with these documents, it will be necessary to submit a short CFC report for 2023. In 2024, for an English company, by default, it will be necessary to submit 2 reports at once – a full one for 2022 and a short one for 2023.

Reports filing in 2024 should reflect the adjusted CFC profit for 2022 in accordance with the declared figures for 2023. In this case, there is no risk of fines being applied. The controller can choose a similar approach to filing reports and calculating financial indicators for filing CFC reports for 2023 as early as 2025. That is why 2022 and 2023 are recognized as transitional years and financial sanctions are not applied to these periods.

It should also be noted that in May 2023, draft law No. 8137 was adopted in the first reading, which significantly simplifies the reporting procedures for CFCs. In the current version of the draft, among other things, it provides more time for the preparation of CFC reports, allowing it to be submitted with tax reports for the next period after the reporting one.

How to submit a CFC report and what requirements it must meet?

Any CFC report is submitted by individuals/legal entities in electronic form, together with a declaration of income/profit through the taxpayer’s electronic account using an electronic digital signature. A full CFC report must, among other things, necessarily cover the following information:

• the name of the state (territory) where the CFC operates;
• the name and legal form of the CFC;
• the size of the share in the CFC, as well as a description of the ownership structure (if any);
• data on the grounds for actual control over the share;
• data of the nominee holder (if any);
• financial indicators (income, profit, amount of adjusted profit, etc.).

Annexes to reporting

Along with the full report of tAnnexes to reportinghe CFC, which contains the financial performance of the CFC for the reporting period, as well as 3 applications are submitted. They reflect (1) adjustments to financial results, (2) securities transactions, and (3) self-adjustment throughout the reporting period prices of controlled operations in relation to goods and services (except for securities) and the amount of tax liabilities on them. These documents must also be accompanied by copies of the financial statements of the CFC for the reporting period, certified in accordance with the norms of foreign legislation. It is necessary to certify documents for use in Ukraine using the procedure of legalization or affixing an apostille (depending on whether the country is a signatory to the Hague Convention of 1961). Documents drawn up in a foreign language will need to be translated into Ukrainian and notarized. Properly certified copies of the CFC financial statements, as well as certified translations, will be submitted with the CFC reporting. If necessary, an application for waiving exemption from taxation of profits in any form is also submitted to the general package of documents.

A short report should not contain any financial figures, but it should contain general information about the foreign company, including its share and the ownership structure of this share.

A complete list of information required to fill out the report, including for applications, indicates the above order of the Ministry of Finance of Ukraine.

What happens if you violate the requirements of the legislation on CFC?

• The main sanctions for violation of this legislation are calculated taking into account the subsistence minimum as of January 1 of the reporting year (in 2023 it is UAH 2,589). Sanctions for violation of CFC norms are as follows:
• failure by the controller to submit a CFC report – a fine of 100 subsistence minimums (UAH 258,900 in 2023);
• late submission of a CFC report – a fine in the amount of 1 subsistence minimum for each calendar day of delay, but not more than 50 subsistence minimums (in 2023 – a maximum of UAH 129,450);
• non-displaying of the CFC or the results of its activities – a fine in the amount of up to 1,000 subsistence minimums for each fact of non-displaying of the CFC and / or not for all the displayed amounts (in 2023 – a maximum of UAH 2,589,000).

We note again that 2022 and 2023 are recognized as transition years, therefore the specified penalties for violations made in relation to these periods do not apply. We also note that the draft law No. 8137 mentioned above in its current version also reduces some penalties, in particular for late notification on a CFC.

Preparation and submission of CFC financial statements

Specialists are ready to help with the definition of controlled foreign companies in your case, data collection, relevant calculations, consideration of the grounds for tax exemption, as well as direct preparation of reports. In addition, lawyers are ready to represent your interests during tax inspections, as well as disputes with them.

Azola Legal Services lawyers will keep you informed about the details of the law applying, its expected innovations, and will also help you correctly comply with the requirements of CFC regulations in the near future.