Everything You Need to Know About the State Tax Service’s Requests Regarding CFCs

Controlled Foreign Companies (CFCs) remain in the focus of the State Tax Service of Ukraine (STS), despite the temporary suspension of penalties for failing to submit CFC reports due to martial law. Some CFC controllers may believe that this allows them to postpone their obligations, but the tax authorities are actively monitoring the existence of CFCs and are already sending requests regarding the reasons for non-submission of reports.

Why does the STS continue to monitor CFCs? How should one correctly respond to STS requests and avoid problems in the future? We will examine all key aspects in this article.

Why Does the STS Continue to Monitor CFCs?

Despite the temporary non-application of fines for failure to submit CFC reports, the State Tax Service of Ukraine (STS) has not suspended control over this matter. There are several reasons for such close monitoring

1. Combating Tax Evasion

The introduction of CFC rules in Ukraine aimed to make the financial operations of foreign company controllers more transparent and to prevent the outflow of capital to preferential tax jurisdictions or cases where a person entirely avoids paying taxes. The absence of penalties does not mean that the tax authorities are not collecting information and analyzing potential violations

2. Use of Open Sources and International Data Exchange

The STS has access to various open sources, including company registries, customs databases, court rulings, and leaked information. Additionally, Ukraine participates in the international automatic exchange of tax information (CRS), which allows tax authorities to receive annual information about Ukrainian residents’ accounts abroad.

Moreover, we often forget that the STS actively uses tax information exchange upon request, and since 2023, it has significantly increased its activity in sending inquiries to tax authorities in other countries. Tax authorities frequently request information such as corporate structure schemes, beneficial owners, company directors and their connection to Ukraine, office premises, the number of employees, employment relationships, powers of attorney for signing contracts or managing accounts, and the effective tax rate of the CFC.

According to information from the tax authorities, the largest number of inquiries were sent to Republic of Cyprus (32%), Switzerland (18%), United Kingdom (9%), Germany and Luxembourg (7% each), Netherlands, Italy, and Spain (5% each), Other countries (12%). Thus, data collection is ongoing and systematic.

3. Preparation for Mass Penalty Enforcement After Martial Law Ends

By identifying violations now, the STS is creating a database for future sanctions. After the end of the transitional period, all those who failed to submit reports may face penalties without the possibility of avoiding liability.

4. Identification of High-Risk Taxpayers

CFC controllers who neglect their tax obligations may fall into the “high-risk taxpayer” category. This means their financial activities could be scrutinized more thoroughly, potentially leading to additional inquiries regarding the origin of funds and compliance with tax legislation.

The STS’s primary aim is clear: identifying taxpayers who neglect their obligations and fail to pay taxes, ultimately ensuring increased revenue for the state budget.

However, monitoring isn’t the only measure our tax authorities rely on. Increasingly, the STS sends individual inquiries directly to CFC controllers, which we will discuss further below.

Requests regarding CFC: grounds, deadlines, and implications

The State Tax Service of Ukraine is actively sending inquiries regarding Controlled Foreign Companies (CFCs), despite the temporary suspension of penalties for non-submission of reports. These inquiries represent the initial step toward potential future sanctions. Therefore, it is essential for CFC controllers to understand clearly on what grounds such inquiries are issued, the deadlines for responses provided by the legislation, and the risks associated with ignoring these requests.

Grounds for Issuing CFC-related Inquiries

According to Article 73 of the Tax Code of Ukraine (TCU), the State Tax Service has the authority to issue inquiries related to Controlled Foreign Companies (CFCs) based on the following grounds:

1. Identification of information about CFCs from open sources (foreign business registers, customs data, CRS etc.).
2. Notifications from banks or state institutions: Ukrainian banks and other authorities must inform the STS within five days if they become aware that a resident of Ukraine (either an individual or legal entity) holds a share in a foreign company.
3. Detection of the absence of submitted reports by a CFC controller (for example, if the controller has submitted a CFC notification about establishing a foreign company but has not filed the required CFC reporting)
4. Identification of discrepancies in submitted reports (for example, if the CFC controller filed a general declaration but did not report on the foreign company).
5. Conducting a tax audit to verify the CFC controller’s compliance with the criteria specified by the Tax Code of Ukraine.

Deadlines for responding

According to the provisions of the Tax Code of Ukraine, taxpayers are required to respond to inquiries from the State Tax Service within 15 working days from the day following receipt of the request. If providing a response requires submitting a substantial volume of documents, taxpayers may request an extension from the STS.

In case of refusal to provide information or failure to respond within the specified deadline, the STS may consider this as grounds for conducting an unscheduled documentary tax audit.

Liability for Failure to Respond

Although penalties for non-submission of CFC reports are temporarily not applied under martial law conditions, liability for failure to respond to requests from the STS has not been abolished.

Therefore, if a response to an STS request is not provided or documents are submitted incompletely, a fine may be imposed:

• 5 minimum wages – if the request concerns the verification of CFC data (or other issues specified in subparagraphs 6-8 of Article 73.3.1 of the Tax Code of Ukraine).
• 1 minimum wage – if the request is sent on other grounds provided for in Article 73 of the Tax Code of Ukraine.

And the most important point – even if the fine is paid, the requested information will still have to be provided. Therefore, it is better to respond promptly and avoid unnecessary complications

Apart from the fine, taxpayers may face other consequences:

• Risk of an unscheduled audit due to failure to provide a response.
• Recording of the violation in the STS database for future application of sanctions after martial law is lifted.

Thus, STS requests regarding CFCs are not just a formality but a real control mechanism. Even though penalties for CFC reporting are temporarily not applied, responses to tax authorities’ requests must be provided on time to avoid future issues.

How to Respond to an STS Request Regarding CFC and What Documents to Attach?

Upon receiving a request from the State Tax Service regarding a CFC, it is crucial to respond correctly and on time. The response must be well-reasoned, comply with the Tax Code of Ukraine, and be accompanied by supporting documents.

Action Algorithm Upon Receiving an STS Request

1. Check the content of the request – What specific questions is the tax authority asking?
2. Determine the legal grounds for the request – The STS must refer to the relevant articles of the TCU. It is important that the request is properly drafted in accordance with the TCU, as an improperly prepared request releases the taxpayer from the obligation to provide a response.
3. Gather the necessary documents to support your position.
4. Prepare a response within the statutory period (15 days) or request an extension if needed.
5. Send the response via a registered letter with acknowledgment of receipt or through the taxpayer’s electronic cabinet.

The response must be accompanied by documents confirming the provided information.

What Documents Can Serve as Supporting Evidence?

Depending on the situation, the response to the STS request regarding a CFC may include the following supporting documents:

• Extract from the foreign company register – confirms the CFC status and includes statutory documents.
• CFC financial statements – if the company had no activity or minimal income.
• Agreement or decision on CFC liquidation – if the company has been closed.
• Document confirming that the individual is not a CFC controller (e.g., ownership share is below 50% or there is no actual control).
• Copies of submitted reports – in case the reports were filed but not received by the STS.
• Letter explaining the reasons for non-submission of reports.
• Tax returns and certificates of CFC income and expenses.

The STS response must be properly prepared and fully supported with the necessary documents to avoid fines and minimize the risk of additional audits.

If the request is complex or there are risks regarding the provided information, it is advisable to seek professional support. Azola Legal Services will assist you in preparing a legally compliant response, ensuring professional guidance throughout the process, so your business remains legally protected and operates without unnecessary risks.

Remember, competent and timely communication with the STS is key to maintaining a good company reputation and ensuring transparency in the eyes of regulatory authorities.