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What is a Controlled Foreign Company and how to live with it? (1210)

What is a Controlled Foreign Company and how to live with it? (1210)
The other day, a lot of noise arose among businesses after the signing by the President of Ukraine of the Law of Ukraine "On making changes to the Tax Code of Ukraine to thoroughly administrate taxes, fix technical and logical inconveniences in tax legislation.

This Law amended the Tax Code of Ukraine and created a new terrible concept of "CFC" (controlled foreign company).
In this article, I will try to answer the following questions in simple terms:
  • What is KIK and what is it eaten with?
  • To whom does this Law apply?
  • What does he threaten?
  • Will foreign business die for Ukrainians?
  • Is there light at the end of the tunnel, and what should we do next?

For those who are too lazy to read, a short summery: “Everything will be fine. KIK is not as scary as we were scared. Even if your company is a CFC, you most likely don’t need to do anything other than the need to notify the tax office and file reports. ”...

Let's start.

So, CFCs are foreign companies, as well as other legal forms without the creation of companies (trusts, partnerships, etc.), the controlling person of which is residents of Ukraine (individuals and legal entities).

Am I the controller?
  • If you own more than 50% of the company, either
  • If you own more than 10% of the company and there are several of you, Ukrainian shareholders, and the total amount of your share is more than 50%, either
  • You, or with others, exercise ACTUAL control over a foreign company,

I have bad news for you - you are the controlling person.

Yes, you understood correctly, splitting the share into a crowd of friends / family so that everyone has less than 10% will not work.

Part of the company is all corporate (or rights in formations without creating a legal entity) rights or other powers with which you can:
  • Influence the decision in the main board of the company.
  • Receive dividends.
  • Block the decision on the distribution of profits.
  • To receive a part of the company's property upon its liquidation.

I can already see how you started to select non-residents to whom you can give 51% of the company and live in peace. Forced to disappoint again. Ownership of a company will be counted not only by the legal distribution of shares, but also by who actually exercises control.

That is, if it is established that you own 49% of the shares (or any other lesser amount), carry out the actual decision-making, give instructions on what and how to do, what contracts to sign, act by proxy and can enter into material transactions without the approval of the governing body , then you still get in. Even if you are not in the company at all, you are cunning and put your friends, brothers, drivers or other related persons there, that is, there are risks that the tax authorities will still consider you the controlling person of these companies.
This means that if your correspondence by mail/messenger pops up somewhere, or your calls with instructions to a person (the owner of the main block of shares) what he should do, you become a controlling person.

Of course, the question remains of proving who really makes the decisions and about the connection of persons with you. And here is the first good news. Proving is the responsibility of the tax authorities.

But do not rush to start celebrating, it is better to take care of the information security of the company and draw up business tactics. Trust me, you'll need it.
So, you and I have understood whether your company belongs to CFC or not.

What's next?
Если НЕТ, тогда на этом все, можешь дальше не читать.

If YES, then you have an obligation to notify the state. authorities on the existence of such a company, as well as submit reports on its financial results. Here the legislator made it so that if the financial year in your jurisdiction differs from the moment of filing reports in Ukraine, then you can easily submit a report on the company for the previous year next year.

Of course, the main purpose of the emergence of CFCs is to create a tax base that was previously inaccessible to the Ukrainian tax authorities and allowed businesses to freely accumulate funds in their foreign companies or foreign accounts.

Now the controlling person is the payer of CFC income tax.
You are not at risk if:
  • Your total income from all your CFCs does not exceed EUR 2 million. Therefore, startups and all small / medium businesses can exhale;
  • If you are a public company that is traded on an exchange.

And also if:

Between Ukraine and the country of incorporation of your company there is an Agreement on avoidance of double taxation, and one of the following conditions is met:
  • You pay a tax of at least 13% (Bulgaria, Hungary, Cyprus and Estonia - alas)
  • Part of the company's passive income is no more than 50% - this is where a large business that is active can relax. The only fly in the ointment is that the company must have real opportunities to perform all operations (personnel, capital, office, etc.). Therefore, you will have to create a certain substance.

If you did not fall into any of these conditions, then get ready to pay 18% taxes.

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