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

The rules of the CFC apply to a natural or legal person resident of Ukraine if they:

• Own a share of more than 50% in CFC, or
• Own a share of more than 10% in CFC (for the period 2022-2023 - 25%), provided that several residents of Ukraine collectively own a share of 50% or more in CFC, or
• Exercise actual control over CFC independently or together with related persons.

When determining the share of ownership in CFC, the sums of shares are taken into account, which:

• Belong to a resident of Ukraine directly or indirectly through other persons.
• Belong to any related persons of the resident directly or indirectly through other persons.

For legal entities, these are companies or individuals who directly or indirectly own corporate rights in the amount of 25 percent or more; or in which one and the same person makes decisions regarding the election to management positions; or is the ultimate beneficial owner; or exercises the powers of a sole executive body.

For physical persons, it includes a husband (wife), parents (including adoptive parents), children (adults/minors, including adopted), full and half-born brothers and sisters, a guardian, a child under guardianship, or guardianship.

If the ownership of the CFC is conducted through related persons, one of the following factors is sufficient to obtain the status of a controlling person:

• Influence on the corresponding share of votes in the highest governing body of the CFC (e.g., the general meeting).
• Receiving a part of the CFC's profit.
• Blocking the decision on the distribution of part of the CFC profit.
• Receiving a part of the assets of the CFC in case of liquidation.

If a person does not own a share in the CFC but exercises actual control over the CFC, they will also be recognized as a controlling person if they have significant or decisive influence on the conclusion of transactions, disposal of assets and profits of the CFC, or termination of activities.

The risk of acquiring the status of a CFC controller exists in the presence of at least one of the following circumstances:

• Provision of binding instructions by the person to the management bodies of the CFC; or
• Conducting negotiations regarding the conclusion of CFC contracts and the agreement of their essential conditions, which are only formally approved by the management bodies or are carried out without approval; or
• The presence of a power of attorney to carry out essential transactions from the CFC for a period of more than one year without the need for prior approval of such contracts; or
• Carrying out operations on bank accounts of CFC or the possibility of blocking operations on such accounts; or
• Designation as the founder (beneficiary) of CFC when opening accounts.

Each CFC controller is obliged to:

• Notify the tax office within 60 days about the acquisition of a share/control in CFC or a change in its status as a controller;
• Annually submit a report on CFC;
• Pay taxes under certain conditions.

‍If you have any questions, Avitar will help:

• Analyze whether the rules of the CFC apply to you;
• Determine whether there are grounds for exempting the income of the CFC from taxation in Ukraine;
• Develop a work model that will help reduce the tax burden;
• Analyze the financial statements of the CFC and determine the adjusted profit of the CFC subject to taxation in Ukraine;
• Deal with CFC reporting;
• Prepare a tax declaration on assets and income;
• Prepare a report and notice on CFC.

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