Definition of Controlled foreign company (CFC) and Controller Criteria. Obligations of the Controlled foreign company (CFC) Controller

For legal entities, related parties are companies or individuals who directly or indirectly hold 25% or more of corporate rights, or where the same person makes decisions regarding the appointment of management positions, or is the ultimate beneficial owner, or has the powers of a sole executive body.
For individuals, related parties include:

• Spouse, parents (including adoptive parents), children (both adult and minor, including adopted), full and half-siblings, guardians, and care providers.
• If ownership in a CFC is held through related parties, one of the following factors is sufficient to qualify as a controlling party:
• Influence on the relevant voting share in the highest governing body of the CFC (e.g., general meetings);
• Receipt of a portion of the CFC’s profit;
• Blocking a decision regarding the distribution of part of the CFC’s profit;
• Receipt of part of the CFC’s assets in case of liquidation.

If an individual does not own a share in the CFC but exercises de facto control over it, they will still be considered a controlling party if they have significant or decisive influence on entering into agreements, managing assets and profits, or terminating activities of the CFC.
The risk of obtaining the status of a CFC controller exists if at least one of the following circumstances applies:

• Issuing binding instructions to the management bodies of the CFC; or
• Conducting negotiations on entering into agreements with the CFC and agreeing on their essential terms, which are only formally approved by the management bodies or executed without approval; or
• Having a power of attorney for conducting significant transactions on behalf of the CFC for a period longer than one year without the need for prior approval of such transactions; or
• Conducting operations on the CFC’s bank accounts or having the ability to block operations on such accounts; or
• Being indicated as the founder (beneficiary) of the CFC when opening accounts.

Case: Ukrainian Company with International Assets

Problem: A Ukrainian company engaged in foreign operations owned 60% of the shares in a foreign company. The client was unsure whether it fell under the CFC rules and whether they were required to submit reports in Ukraine.
Solution: We conducted a detailed analysis of the company structure and determined that it fell under the CFC rules. We then helped the client optimize their ownership structure and tax obligations, which led to a reduction in the tax burden.
Result: The client filed the necessary reports, avoiding penalties, and continued their business with minimal tax risks.

Contact Us for professional help in managing controlled foreign companies and optimizing tax obligations!