NEW TAX ERA IN UKRAINE: CFC RULES IN UKRAINE
On January 16, 2020, the Verkhovna Rada of Ukraine voted for the adoption of draft law No. 1210, he put an end to many years of disputes over the reform of the tax legislation of Ukraine and the CFC in Ukraine.
Implementation of the BEPS plan, deoffshorization, tax transparency are the main principles laid down in the draft law.
When the law is signed, the existing rules for all will change. This will affect both Ukrainian companies and foreign investors. One key change for domestic taxpayers is the CFC rules.
Note: CFC rules are rules of controlled foreign companies.
CFC RULES AS THERE ARE
It is expected that these rules will become an effective method by which the state will be able to tax taxes on the profits of foreign companies, including partnerships. Today, such rules are already used in 40-50 countries of the world.
WHAT DOES ALL THIS NEED FOR?
Suppose an entrepreneur lives in Ukraine. It also conducts its business activities. Naturally, he is obliged to pay income taxes in the same country, even if they are received abroad.
Suppose an entrepreneur abroad has real estate and shares of foreign corporations that generate a profit of one million euros each year.
Since he is the actual owner of the shares, the entrepreneur transfers them to his own company registered abroad. At the same time, this company does not have employees and resources, and the profit with assets is controlled by the same entrepreneur.
From the position of lawyers, the profit is not our entrepreneur, but his foreign company. The income of this company is not taxed in Ukraine, while there is no payment of income in favor of the entrepreneur.
It turns out that a foreign company serves as a screen between income abroad and our entrepreneur.
This alignment allows our entrepreneur to make non-taxable profits in Ukraine before receiving official dividends. But this may not happen.
If an entrepreneur moves to a permanent place of residence abroad and leaves the presidency of Ukraine, he will be able to fully or partially evade Ukrainian taxation.
Moreover, a company registered abroad by our entrepreneur also does not pay tax, since there is no corporate tax.
CFC rules apply to taxation of similar entities. This allows us to exclude the separate tax status of a foreign company and include its profit in the income item of our entrepreneur.
Thus, that million euros of a foreign company will be counted as the income of our entrepreneur in Ukraine. You will have to pay tax in Ukraine on these incomes.
WHAT IS INCLUDED IN THE CONCEPT OF KIK IN UKRAINE?
To understand the principle of operation of the CFC rules, it is necessary to determine what CFC means. For tax legislation, CFC is a company with or without legal entity status. It could be, for example, a partnership. The main thing is that the company is controlled by a resident of Ukraine.
The concept of control provides for compliance with one of the following requirements:
- 50% of the assets of CFC belong to a resident of Ukraine;
- a resident of Ukraine together with the same residents must personally own over 25% of the assets of the CFC. This condition is valid if joint ownership with the same residents is not less than 50% and it does not matter whether these persons are related or not.
- a resident of Ukraine controls the CFC after the fact, regardless of the equity participation with other residents.
The principle of determining the status of the owner of a CFC or the degree of control over it is quite broad. The determination of a resident of Ukraine as the beneficiary of a foreign company when opening a bank account is already the basis for establishing control.
IS THERE AN OPPORTUNITY TO CHANGE THE AMOUNT OF TAXATION PROFITS TO THE REDUCING SIDE?
It is assumed that some CFC income can be exempted from taxation, but if at least 1 of some conditions is met, now more than 80 countries are fulfilling these conditions.
- In fact, income tax is levied from the company at a rate of 13% to 50%.
- Total annual income of a maximum of 2 million euros, for a company controlled by one resident with a foreign registration.
- CFC must be public, and shares are quoted on a legal exchange.
- It should actually be a charitable organization.
Note! These rules apply to taxation of passive income. The profit of a foreign company is taxed under Ukrainian laws only if a tax convention is signed between the countries.
But, one way or another, compliance with any of the above conditions will not exempt from the mandatory filing of a declaration and the provision of information about the CFC in Ukraine.
HOW IS KIK PROFIT TAXED?
Profit data is included in the income statement, taxed at 19.5% for individuals. residents, for legal entities the tax will be about 18%. Fiz. individuals the tax rate may be reduced to 10.5% if the profit is distributed in the form of dividends.
All income should be determined in proportion to the share control over the company. So, if KIK’s profit was one million euros, and our entrepreneur’s share is 60%, then he can include only 600 million euros in revenue.
When the CFC pays corporate tax abroad at a lower rate than in Ukraine, the difference between the amount of Ukrainian and foreign taxes will have to be paid according to Ukrainian laws.
WHEN THE RULES WILL BEGIN TO ACTION?
They will take effect on 1.01.2021. At the moment, there is some kind of hesitation regarding the time when to report on the CFC.
FROM WHICH SOURCES WILL THE INFORMATION ABOUT KIK FOR TAX AUTHORITIES RECEIVE?
Most likely, in the near future Ukraine will be connected to an automatic tax information exchange system. This will allow her to receive information about all financial accounts of a company registered abroad.
At present, more than 100 states are attached to this exchange.
And most importantly, Law No. 1210 obliges Ukrainian banks to notify all information about residents of Ukraine to tax authorities. Therefore, it will not be possible to hide information about profit for a long time.
HOW DOES THE KIK PROVISIONS CONFLICT WITH TAX CONVENTIONS?
Some taxpayers tried to argue with the introduction of CFC rules, and relied on the provision of tax conventions. That’s right, because tax conventions do not give the state the right to tax the income of a foreign company that is not their resident.
However, these rules are superimposed on the income of the controlled person, but not on his company. That is why they are not considered to be contrary to the norm of the tax convention.
Specialists of Eternity Law International will provide you with professional services in full legal support, selection of documents and we will provide advice on this issue.