A foreign company does not make business «invisible» to the Ukrainian tax authorities. If its owner remains a tax resident of Ukraine, they are obligated to notify the state about such a company, report annually, and, depending on the structure, pay tax in Ukraine on this company's profit, even if the money has not been credited to their account. This is precisely what is regulated by the rules on controlled foreign companies (CFCs), which still often go unnoticed by entrepreneurs entering international markets.
These rules have been in effect in Ukraine since January 1, 2022, but in practice they are still underestimated. For the period of martial law and six months thereafter, fines for failure to submit or untimely submission of the CFC report and for failure to include information in it do not apply, but these relaxations apply only to sanctions: the obligations and CFC corporate income tax have not disappeared anywhere.
In this article, we will examine what a CFC is, who is required to report, when the profit of a foreign company is taxed in Ukraine and when exemptions apply, and what liability is provided for non-compliance with the established requirements.
What is a CFC and who is a controller
CFC rules are established by Article 39-2 of the Tax Code of Ukraine (hereinafter referred to as the TCU). A controlled foreign company is defined as any legal entity (and under certain conditions, an entity without the status of a legal entity, such as a trust or partnership) registered abroad that is under the control of an individual or legal entity that is a resident of Ukraine.
A controlling person is deemed to be a resident of Ukraine who, in particular:
- owns a share in a foreign company of over 50%; or
- holds a stake of over 10%, provided that several Ukrainian residents (individuals and/or legal entities) together hold stakes that in total equal 50% or more; or
- separately or together with other residents of Ukraine who are related persons, exercises actual control over a foreign company regardless of the formal size of the share.
The concept of «actual control» (subparagraph 39².1.6 of the Tax Code of Ukraine) is broader than formal ownership and covers, in particular, the ability to give mandatory instructions to management bodies, dispose of the company's bank account, or act as its representative in relations with banks. Therefore, «transferring» a company to a nominee owner while retaining real control does not exempt one from the status of a controller.
! Important: the obligation arises only if the person is a tax resident of Ukraine, so the residency status should be established in advance. According to subclause 14.1.213 of the Tax Code of Ukraine, an individual is a resident if they have a place of residence in Ukraine. If there is also a place of residence in another state, the center of vital interests (closer personal or economic ties) is decisive. If the state of the center of vital interests cannot be determined, or if there is no place of residence anywhere, the person is considered a resident provided they stay in Ukraine for at least 183 days during the tax year (including the days of arrival and departure). Therefore, if the company owner lives abroad for a long time, in practice, the tax authorities may regard them as a resident of Ukraine as long as ties in Ukraine remain (for example, a place of residence or a registered sole proprietorship). To avoid disputes and unjustified fines, documents confirming the change in the center of vital interests (place of residence, employment, family residence, certificate of tax residency of a foreign state) must be prepared immediately after it occurs.
Two different duties: notification and reporting
Controlled foreign company rules establish two separate obligations that are often confused. Both must be fulfilled.
- CFC report. The controlling person is obliged to notify the controlling authority about the acquisition of a share in a foreign company, in particular during its establishment, or about the commencement of actual control that leads to the recognition of the person as a controlling person, as well as about the alienation of the share or the termination of control that leads to the loss of this status. The notification is submitted for each CFC separately within 60 days from the date of the relevant event (subparagraph 39².5.5 of the Tax Code of Ukraine). The requirement does not apply if the CFC is a public company.
- CFC report. Each year, the controlling person submits a report on controlled foreign companies along with the annual property status and income declaration (individuals by May 1, legal entities by March 1). The report reflects, in particular, the ownership structure, the company's financial performance, and the calculation of adjusted profit. Financial statements of the CFC are attached to the report.
! Important: The obligation to submit a report arises regardless of whether the owner received any payments from the company.
When is the profit of a CFC taxed in Ukraine
A key feature of CFC rules to understand is that it is not the moment of dividend payout to the owner that is taxed, but the profit earned by the company itself at the end of the year. That is, even if the profit remained in the foreign company's account and was not distributed, it may be subject to inclusion in the taxable income of the controlling person.
The adjusted profit of a CFC (determined according to the rules of subclause 39².3 of the Tax Code of Ukraine based on financial statements) is included in the total annual taxable income of the controlling person in proportion to their share and is subject to personal income tax at a rate of 18% (9% if the profit is distributed to the controller before submitting the CFC report and reflected in the tax return), as well as the military levy (5%). Thus, from the perspective of tax optimization, for a Ukrainian resident controller, the payment of dividends is more advantageous, since the tax rate is reduced to 9% (provided the payment is made before the submission of the report).
At the same time, the rules also provide for mechanisms that reduce the tax base. For example, the adjusted profit of a CFC is reduced by the amount of dividends received from other CFCs (subparagraph 39².3.2 of the Tax Code of Ukraine), as well as from legal entities registered in Ukraine (subparagraph 39².3.2.7 of the Tax Code of Ukraine). Moreover, dividends from Ukrainian legal entities are taxed as if they were received directly by the controller (subparagraph 170.13.3 of the Tax Code of Ukraine), that is, at the rates applicable to dividends (5% and 9%, depending on whether the company is a corporate income tax payer). Due to this, the dividend flow within the group generally does not create an additional tax burden compared to direct ownership.
When do the exemptions apply
The legislation provides for cases where the adjusted profit of a CFC is exempt from taxation. The main grounds (subparagraph 39².4 of the TCU):
- Criterion of the effective rate or share of passive income (subparagraph 39².4.1 of the TCU). The CFC profit is exempt if there is a double taxation avoidance treaty or an agreement on the exchange of tax information in force between Ukraine and the CFC's state of registration, provided that one of the following conditions is met:
- CFC actually pays corporate income tax at an effective rate not lower than the base rate in Ukraine or lower than it by no more than 5 percentage points (i.e., not less than 13%); the effective rate is the ratio of corporate income tax expenses to profit before tax according to financial statements, rather than the nominal rate of the country; or
- the share of passive income of the CFC does not exceed 50% of its total income (passive income includes, in particular, dividends, interest, and royalties).
This is precisely where the difference between companies matters: an operating company with predominantly active income (sales, services) usually passes this test, whereas a pure holding company (whose income is formed mainly by dividends) or a company on a preferential regime with royalty income typically does not. However, if passive income exceeds 50%, it may be recognized as active when the CFC actually performs significant functions, bears risks, and has the necessary resources (qualified personnel, fixed assets, sufficient capital); the tax authority often questions such arguments, so one must separately take care of the company's economic substance in the country of registration.
- Maximum limit of total income (subclause 39².4.2 of the Tax Code of Ukraine). CFC profit is exempt if the aggregate income of all CFCs of a single controlling person from all sources, according to financial statements, does not exceed the equivalent of EUR 2 million at the end of the reporting period. In this case, the adjusted profit does not need to be calculated, but the CFC report must be submitted.
Even if there are grounds for exemption, the obligation to submit notifications and the CFC report remains—the person is exempt from profit taxation, not from reporting.
Liability for non-compliance
Sanctions for failure to fulfill obligations regarding CFCs are very significant (p. 120.7, Art. 120 of the Tax Code of Ukraine). The amount of fines is tied to the subsistence minimum for an able-bodied person as of January 1 of the reporting year (in 2026 – UAH 3,328):
- for failure to submit a CFC report – a fine of 100 living wage minimums (332,800 UAH);
- for late submission of the report – 1 subsistence minimum for each day of delay, but not more than 50 subsistence minimums (up to UAH 166,400);
- for failing to report the acquisition or alienation of a share in a CFC within the established 60-day period, a fine of 300 subsistence minimums for each such instance applies (UAH 998,400);
- for failure to reflect information on existing CFCs in the report - a fine of 3 percent of the CFC's income amount or 25 percent of the CFC's adjusted profit for the respective year not reflected in the report, depending on which value is greater, but not more than 1,000 living wage minimums (3,328,000 UAH).
Martial law should be considered separately: temporarily, from January 1, 2022, and during the period of martial law and for six months following the month in which it is terminated or revoked, fines for failure to submit or untimely submission of the CFC report and for failure to reflect information therein shall not be applied (Law No. 3706-IX, effective July 1, 2024).
! Pay attention. This is a deferral of the application of sanctions, rather than a cancellation of obligations: notifications and reports are submitted within the usual deadlines, and the CFC profit tax is accrued. Regarding the fine for failure to notify about the acquisition or alienation of a share, there is currently no official position or unambiguous judicial practice, so one should not count on a moratorium.
What to keep in mind in practice
CFC rules are not a reason to abandon an international structure. However, the specifics of reporting and calculating the total tax burden for an owner who is a tax resident of Ukraine must be taken into account even at the stage of its creation. Here are a few practical guidelines:
- the presence of a foreign company does not mean that the tax office cannot see it: automatic exchange of financial information (CRS) operates between countries, so the State Tax Service receives data on residents' accounts abroad. Currently, data exchange takes place with more than 120 countries. Therefore, the structure should be built transparently and with reporting in mind right away;
- It should be determined in advance which group companies pass the exemption tests and which ones will generate tax at the owner level;
- the type of company income (active or passive) directly affects the tax consequences, so it should be planned consciously;
- The notification submission (60 days) and annual reporting deadlines must be tracked to avoid penalties.
Conclusion
If you are building a business abroad but remain a tax resident of Ukraine, CFC rules apply to you directly. The main thing is not to ignore them: a properly structured and declared setup allows you to legally optimize your tax burden and avoid sanctions, whereas «silence» sooner or later turns into fines and additional assessments.
Law firm Bargen is ready to help analyze your current foreign company structure and optimize it taking into account the tax residency of the owner, determining CFC status, preparing notifications and reporting and by assessing the grounds for dismissal.
