On 17 August 2020, the Ukraine State Fiscal Service (SFS) has issued a guidance letter 3380/IPK/99-00-05-05-02-09, which clarifies the taxation of profits of controlled foreign companies (CFCs). In Ukraine, the CFC rule will be applicable from 1 January 2021.

CFC is defined as any legal entity registered in a foreign state or territory that is recognized as being under the control of a Ukrainian resident individual or legal entity according to Article 392. Individual or legal entities must pay the taxes due on a CFC’s profits to the extent of their stake in the CFC’s capital. The CFC’s profits are adjusted for tax purposes, as stipulated by article 39 and tax treaties to which Ukraine is a party

The new rules define the specifics of taxation of CFC profits. Thus, the object of taxation is a part of the adjusted profit of a CFC, proportional to the share owned or controlled by such an individual (legal entity) as of the last day of the relevant reporting period.

Regarding the exemption from taxation of CFC profits, the adjusted profit of a CFC is not subject to inclusion in the total taxable income, and is not subject to corporate income tax of the controlling person if the following conditions are met:

  • between Ukraine and foreign jurisdiction, the seat (registration) of the CFC is a valid agreement on the avoidance of double taxation or on the exchange of tax information and
  • any of the following conditions are met:
    • The CFC actually pays income tax at an effective rate that is not less than the main corporate income tax rate in Ukraine or is less than such a rate by no more than 5 percentage points, or
    • the share of passive income of a controlled foreign company is no more than 50% of the total CFC income from all sources.

If the share of the CFC’s passive income is more than 50% of the total amount of the CFC’s income from all sources, for the purpose of applying this article, such income is recognized as active if the CFC:

  • actually performs essential functions, bears risks, and uses assets in transactions that result in the receipt of corresponding active income;
  • has the necessary resources to perform these functions, manage risks, and use assets (qualified personnel, fixed assets owned or used, sufficient equity capital, etc.).

For the purposes of the guidance letter, the effective corporate income tax rate is calculated by dividing the cost of paying corporate income tax by the amount of profit before tax in the financial statements for the relevant calendar year and multiplying by 100%.

The adjusted profit of a CFC shall not be included in the total taxable income that is not subject to corporate income tax of the controlling person in the event that any of the following conditions are met:

  • total aggregate gain of all CICs one controlling person from all sources according to the financial reporting does not exceed the equivalent of 2 million euros at end of the period
  • A CFC is a public company whose shares (shares) are traded on a recognized stock exchange. The list of markets and the requirements for admission of shares (stakes) of public companies are in circulation on the specified stock exchange, established by the Cabinet of Ministers of Ukraine 

The exemption applies to all CFCs included in the consolidated financial statements of such a public CFC, as well as to other foreign companies associated with a public CFC in terms of dividends arising from such a public CFC. If a CFC subject to such an exemption pays dividends to a CFC that is not a public company, such dividends are taken into account when calculating the adjusted profit of such a CFC on a general basis.

Furthermore, if the controlling person of the foreign company is a legal entity, then the CFC report is submitted within 60 calendar days (for individual foreign company 60 calendar days) following the last calendar day of the reporting (tax) year.