CFC reporting: clarifying reports and follow-up by CFC controllers

Considering the rather significant fines for incorrect submission of the CFC report provided for in Art. 120.7 of the Tax Code of Ukraine, the issue of correctly filling out Reports on CFC after May 1, 2024, after the deadline for submitting the specified types of reporting, has not lost its relevance. Moreover, the application of fines is not the only possible lever of influence on the part of the Ukrainian tax authorities on CFC controllers who made mistakes when compiling CFC reports.

According to Art. 39-2.6.1 of the Tax Code of Ukraine, the State Tax Service in Ukraine has the right to send the CFC controller a request for additional explanations regarding the controlled foreign company if there is tax information that, in particular, the information specified by the controlling person in the CFC report does not correspond to reality or contain errors. At the same time, in case of failure to answer the request within the prescribed period, the Ukrainian Tax Service has a legally regulated opportunity to appoint a tax audit of the controlling person.

Thus, timely correction of the error by the CFC controller in the previously submitted reporting will prevent the Ukrainian tax authority from applying appropriate measures to it. Given this, it is crucial to determine the procedure and the following algorithm of actions of the controllers of foreign companies to minimize any measures of tax control implementation and the application of negative consequences (tax audit, bringing financial responsibility) to controlling persons.

Is it possible to correct errors in previously submitted CFC Reports by law?

Yes. According to paragraph 10 of the Order of the Ministry of Finance of Ukraine “On approval of the form of the Report on controlled foreign companies, the abbreviated form of the Report on controlled foreign companies, the Procedure for filling out the Report on controlled foreign companies, the abbreviated form of the Report on controlled foreign companies and submission to the supervisory authority and Changes to the form Tax declaration on corporate income tax” dated as of 25.08.2022 No. 254, if the taxpayer found that in the previously submitted Report / abbreviated Report the information was not provided in full or the Report / abbreviated Report contains errors or deficiencies, such taxpayer has the right to submit a clarifying Report / abbreviated Report (marked as “clarifying”) after the deadline for submitting a Report / abbreviated Report for the same reporting period.

That is, the current legislation directly allows for correcting errors in previously submitted Reports on CFC after May 1, 2024.

What could be the errors/defects in the previously submitted CFC report?

Taking into account the procedure for filling out CFC Reports, as well as taking into account several relevant clarifications regarding the correctness of data display in CFC reporting and our experience in analyzing various situations in the context of CFC campaign reporting, we can highlight some mistakes that payers made quite often of taxes during self-filling of the specified reports:

1. The list of transactions of a controlled foreign company with related non-residents, non-residents from low-tax jurisdictions, and non-residents registered in the relevant organizational and legal forms provided for by the lists approved by the Cabinet of Ministers No. 1045 and No. 480 is not displayed

Thus, on April 17, 2024, the State Tax Service in Ukraine published Information Letter No. 3/2024, “Regarding certain issues of the introduction of rules on controlled foreign companies,” in which it changed the previously expressed position regarding the filling in of items 29-34 in the Reports. We will remind you that earlier, the Ukrainian tax office indicated that if the profit of the CFC is exempt from taxation, filling in the above items is optional (Individual tax consultation No. 137/IPK/99-00-24-03-03 dated 09.01.2024).

However, in the published information letter, the Ukrainian Tax Service noted that even though the income of the CFC is exempted from taxation, the coverage of the specified indicators, namely the operations listed in items 29-34 in the CFC reporting, will ensure the appropriate process of administration of controlled foreign companies.

Thus, in any case, controlling persons had to display a list of CFC transactions with related non-residents or non-residents registered in jurisdictions defined by the CMU as low-tax or with those registered in the relevant organizational and legal forms.

2. Incorrect certification of copies of financial statements, which are submitted together with the Report on CFC

Starting from the date of entry into force of Law No. 466-IX, which, in fact, implemented the institution of controlled foreign companies into national legislation, there was a long-term discussion among lawyers, accountants, and auditors about how to correctly interpret the provisions of the Tax Code, according to which the report on controlled foreign companies must be accompanied by “duly certified copies of the financial statements of the controlled foreign company”.

Some experts pointed out that the legislator requires apostilled and notarized financial statements. Others insisted that in such a case, it is only a matter of certifying the financial statements of CFC in accordance with the norms of DSTU. The third group of experts pointed out that since the reporting on the CFC, after it is filled out together with the annexes, is subject to signing with the help of an electronic digital signature (EDS), in this case, the requirement for certification of financial statements is fulfilled, and therefore, no additional actions, including the affixing of an apostille, notarization of the document or certification of each page in accordance with the norms of DSTU – is not required.

At the same time, in view of a number of recent clarifications by the State Tax Service, “duly certified copies of the financial statements of CFC” are considered to be their certification in accordance with the standards established by DSTU 4163:2020.

Thus, Clause 5.26 of the National Standard “Requirements for the preparation of documents” (DSTU 4163:2020) stipulates that a note on the certification of a copy of a document consists of the words “according to the original,” the title of the position, the personal signature of the person who certifies the copy, his or her own name and surnames, and the dates of certification of copies.

So, in this case, it was necessary for the company’s controllers to print out the financial statements and put a handwritten signature along with the certifying inscription “According to the original, the title of the position…” on each page of the financial statements.

3. Failure to provide translation of financial statements into English or Ukrainian

According to the positions expressed by the Ukrainian tax office in several individual tax consultations, in particular No. 3466/IPK/99-00-24-03-03-09 09.10.2023, in the case of submitting financial statements in English, translation into Ukrainian is not required. However, documents drawn up in languages other than English require a translation into Ukrainian and proper attestation of such a translation in accordance with the requirements of Art. 78 and 79 of the Law of Ukraine dated September 1, 1993 No. 3425-ХІ “On Notary”.

That is, the Ukrainian tax office accepts financial statements either translated into Ukrainian or authentically drawn up in English. At the same time, when adding to the Report on the CFC financial statements, which are prepared in languages other than those mentioned above, the taxpayer must provide a translation into English/Ukrainian with notarization of the latter.

Thus, according to official statistics published by the State Tax Service on May 1, 2024, the main countries of CFC registration, based on the submitted CFC Reports, are, in particular, the Republic of Poland—25%, the Republic of Cyprus—9%, and the Republic of Estonia—7%, i.e., those jurisdictions in which financial statements are prepared in a national language other than English.

Thus, the controllers of those CFCs registered in Cyprus, Estonia, Poland, and other jurisdictions, in which, according to their national standards, financial statements are prepared in the official language of the company’s country of incorporation (not in English), had to arrange in advance the translation of financial statements into Ukrainian or English with notarization of the latter.

Action algorithm: how should controllers proceed?

In case of detection of errors or the fact of displaying incomplete information about the controlled foreign company, it is necessary to:

1. Prepare the same report (Full or Abbreviated), the correction of which must be carried out by submitting a clarifying report, displaying complete information about the CFC, and filling in all lines in the report in which the information is to be displayed.
2. Correctly identify the type of report by marking “X” next to “Clarifying”.
3. In column 3, correctly indicate the reporting (tax) period to be clarified.
4. After correctly filling out the lines of the Report to be clarified, we recommend adding duly certified copies of the financial statements of the controlled foreign company to it.
5. Sign the Report and its appendices using EDS.

Conclusion

As seen above, many mistakes can be made when preparing and submitting reports from the CFC. This is due to the complexity and fragmentary uncertainty of the legislative wording in regulating the procedure for filling out the CFC report and the lack of currently formed law enforcement practice of the Ukrainian tax office. Given this, it is important to contact specialists who specialize in these issues in a timely manner to avoid possible negative consequences in the form of the appointment of a tax audit or the application of fines.

We advise each client at the application stage, analyze the company’s ownership structure and its financial statements, and assist in the preparation of the CFC report and accompanying documents (necessary Explanations for the Ukrainian tax Office, CFC Addenda, Declaration of property status and income) “from scratch”. Our team is ready to provide you with comprehensive support and full consultation on any issues that arise while compiling and correcting errors in previously submitted reports.