Risk of recognition of a CFC as a permanent establishment

In international business, it is quite common that a company is formally registered abroad, but in fact its management or key decisions are made in Ukraine. It is precisely in such cases that the tax authorities may recognize such a company on the territory of Ukraine as a permanent establishment and impose tax obligations.

Recent court practice, in particular the decision of the Supreme Court in case No. 280/4264/21 dated March 20, 2025, shows that even formal registration abroad does not protect against Ukrainian taxes if real economic activity is carried out in Ukraine through company representatives. This concerns cases where individuals in Ukraine conclude agreements, make management decisions, and control the assets of a non-resident.

This topic is especially important for controlled foreign companies (CFCs). Owners and managers of such companies must understand: even partial management from Ukraine may lead to taxation of the entire activity of the company in Ukraine. In this article, we will examine how the risk of recognizing a CFC as a permanent establishment works and what should be paid attention to in order to avoid unexpected tax consequences.

What is the problem with recognizing a CFC as a permanent establishment?

The problem of recognizing a permanent establishment (PE) of a non-resident in Ukraine arises when a company is only formally registered abroad, but its actual activity is carried out through persons or structures on the territory of Ukraine. The essence here is that tax authorities look not at the company’s registered address, but at the real “control footprint”: who concludes contracts, makes decisions, manages assets, and from where.

Simply put, even if a company is officially foreign, but someone in Ukraine constantly manages its business and receives profit, tax authorities may recognize that the company operates in Ukraine and will tax such a CFC according to Ukrainian rules. This is the main problem — formal registration of a CFC does not save the situation if actual management and activity are “exposed” on Ukrainian territory.

Consequences of recognizing a foreign company as a PE in Ukraine

What are the consequences of such recognition of a CFC as a permanent establishment? The consequences of recognizing a non-resident as a permanent establishment (PE) in Ukraine are quite serious and cover several areas at once.

First, profit received through a PE is subject to taxation at the Ukrainian corporate income tax rate of 18%. Moreover, the tax base is determined according to the principle “as if the PE were an independent Ukrainian company”, meaning that all profit obtained from economic activity in Ukraine is taken into account, including transactions with related companies.

Second, the PE automatically loses the right to international tax benefits. For example, reduced tax rates on dividends, royalties, or interest provided for by double tax treaties may not apply. This may also lead to the application of the full withholding tax rate on repatriation (15%) on any payments to a non-resident from Ukraine.

Third, the Ukrainian tax authority has the right to register the non-resident compulsorily if it discovers that economic activity is carried out through a PE. This entails a fine of UAH 100,000 for failure to register and potential consequences in the form of criminal liability for directors and founders in case of underpayment of taxes.

Fourth, the PE falls under transfer pricing (TP) rules. The profit of the PE must be calculated as if it operates as an independent enterprise under comparable conditions. This may complicate reporting and require additional documentary substantiation of transactions.

Finally, there is an impact on third parties. If a Ukrainian company pays income to a non-resident that has a PE, taxes on such payments may be charged at the full rate. That is, the consequences of a PE affect not only the foreign company itself, but also Ukrainian counterparties and taxpayers.

As a result, PE status not only makes a non-resident a tax “player” in Ukraine, but also imposes complex obligations: from direct taxation of profits and repatriation of income to fines, transfer pricing requirements, and risks for related parties.

Criteria for recognizing a CFC as a permanent establishment

Recently, the tax authorities have been increasingly scrutinizing CFCs that are effectively “shells” — without real activity in the country of registration — in order to identify their permanent establishment in Ukraine. Court practice in such cases has already begun to form, creating a precedent that shows that tax authorities assess actual activity, management decisions, actions of representatives, and control over assets. These criteria become key in determining the existence of a PE. Let us consider them in more detail.

1. The tax authorities assess whether the non-resident actually carries out economic activity on the territory of Ukraine, and not only formal or auxiliary operations. They check:

• provision of services to third parties;
• performance of works or sale of goods;
• participation in advertising, consulting, or other commercial activities;
• regularity of activity (not one-time actions, but systematic activity).

Auxiliary activity is not considered a PE, for example:

• demonstration of products;
• temporary storage of goods;
• agency or commission services on standard terms;
• purchase of goods, collection of information, provision of personnel.

If the functions of the PE coincide with the core activity of the company (CFC), the tax authorities consider it a permanent establishment.

2. Presence of authorized persons acting on behalf of the non-resident in Ukraine. The tax authorities examine who actually manages, concludes contracts, and disposes of assets:

• individuals (including Ukrainian citizens) with a power of attorney or other authority;
• the right to dispose of property, bank accounts, and corporate rights;
• the right to conclude contracts, participate in general meetings of companies, and make decisions on dividends;
• receipt of salary from Ukrainian companies within the group.

3. Presence of a permanent place of activity in Ukraine. A separate office or branch is not mandatory — the key is the existence of a permanent place of business:

• office, factory, workshop, construction site, mine, well;
• place from which management, financial, or commercial operations are carried out;
• availability of premises leased for storage or management of property owned by the non-resident.

When a permanent establishment may be recognized:

• significant volumes of goods are located in Ukraine under the control of a foreign company, and storage or circulation activities appear to be part of the main business process of the non-resident;
• construction, installation, or infrastructure works last more than 12 months;
• project, service, or technical works are performed in Ukraine for a long period — for example, more than 183 days for services or more than 12 months for construction projects, which may indicate stability and regularity of the non-resident’s activity in the country.

4. The tax authorities also analyze how communication and company management are conducted:

• IP addresses: from which computers or networks actions are performed/emails are sent — if predominantly from Ukraine, this is a signal of a PE;
• domain and company website: website management, receipt of applications;
• contacts: Ukrainian phone numbers, messengers, official company contacts that serve clients or partners.

Thus, during audits, tax authorities now look not only at formal documents and paper confirmations, but also at the digital and management footprint: where emails are sent from, which corporate mailboxes are used, who manages bank accounts, how management accounting is conducted, from which IPs and domains communication is carried out, and which contacts are used for transactions. All this data helps tax authorities assess the actual conduct of activity in Ukraine and determine the existence of a permanent establishment.

How to align business processes across different jurisdictions?

Companies operating in several countries often face the fact that each jurisdiction interprets management functions, decision-making location, and involvement of local contractors differently. To avoid confusion, including misunderstandings regarding recognition of a company as a PE, and to ensure stable and predictable operations, it is worth ensuring that the company’s operational structure corresponds to its actual processes in each country.

Therefore, attention should be paid to such business processes that reduce legal uncertainty across different jurisdictions:

• in the jurisdiction of incorporation there should be an office, local employees (director, manager, accountant), regular salaries, and expenses;
• management meetings and board meetings should be held physically and documented (minutes, recordings, invitations) outside Ukraine;
• all key decisions (purchase/sale, dividend payments, amendments to the charter) must be formalized through official minutes/procedures at board meetings held abroad;
• employees and directors should have clearly defined functions in their contracts (operational, administrative, limited authorities);
• for negotiations/transactions in Ukraine, it is advisable to establish a Ukrainian company or hire an independent intermediary agent (sole proprietor or company);
• the main bank accounts and signatories of the foreign company should be located abroad; if access to the account is carried out from Ukraine, document administrative access rights (administrative rights are not equal to signatory rights).

It is important to remember that tax authorities assess actual activity, not only formal documents, so even minor mistakes or poorly thought-out actions may lead to recognition of a PE and tax consequences.

To minimize risks and protect the business, it is recommended to consult with lawyers and tax experts in advance, who will help properly structure activities, prepare the necessary documentation, and provide practical recommendations on interaction with regulatory authorities. This way, you will be able not only to comply with the law, but also to maintain the efficiency of your business.