Submission of CIC reporting: nuances and unanswered questions
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Reporting on controlled foreign companies (CFCs) is one of the important pre-war tax innovations, which was probably the most talked about in the business environment.
With the beginning of a full-scale invasion, it took a back seat for a certain time, but from the end of 2022, it again gained relevance due to the restoration of the obligation to report.
I would like to remind you that the legislation on CIC entered into force on January 1, 2022, but already on March 7, 2022, the reporting period was suspended.
According to the changes, which entered into force on November 25, 2022, reporting and, accordingly, payment of tax again became mandatory within the terms provided by law, regardless of the continuation of martial law.
When it became clear in the fall of this year that the authorities are not going to postpone reporting, business representatives began to speak quite loudly about the fact that this could negatively affect the development of foreign economic activity. In particular, they emphasized serious fines for failure to submit a notification – more than 800,000 hryvnias – more than the possible income from paying the tax.
We know that many citizens of Ukraine, who went abroad due to the war, are trying to open their own business there. That is, now it becomes clear that KIK is not only and not so much about big business, but about small and even micro-business.
Accordingly, the penalty for failure to submit a notice of KIK for a small company can exceed not only the profit received from such a business, but even the entire income.
In addition, if the submission of a notice in most cases is not a difficult action, then the preparation of a report on CIC requires much more time and money.
I propose to mention exactly what duties the controller must perform in connection with direct ownership or influence on a foreign company.
- Submission of a notice of CIC, within 60 days from the moment of acquisition, change, alienation or liquidation of such a company. If the share or actual influence acquired between March 7, 2022 and November 25 of the same year, then the notification had to be submitted by January 23, 2023. The fine for failure to submit a notice on the CIC is 300 subsistence minimums for an able-bodied person (as of January 1, 2023, it is UAH 805.2 thousand).
Registered draft law No. 8137, which provides for fines for overdue payments – 1 amount of the subsistence minimum per day, but no more than 25 amounts (as of January 1, 2023, this is UAH 67.1 thousand). Important: if the tax authorities detect a violation on their own, the fine will be calculated precisely for failure to submit a notification, and not for delay, however draft law No. 8137 proposes to reduce the fine to 50 subsistence minimums – 134.2 thousand UAH.
- Reporting on CIC, preparation and audit should be done simultaneously with the submission of declarations on income tax and on property status and income. It is important that such a report is submitted by the controlling persons regardless of whether the adjusted profit is exempt from taxation.
Submitting a CIC report is no longer as simple as submitting a notice. At a minimum, the company’s financial statements with a translation into Ukrainian are attached to the report, even if its preparation is not provided for by the legislation of the jurisdiction where the company is registered.
The first report can be submitted in 2024 immediately for 2022 and 2023. The above-mentioned application No. 8137 proposes a change in the deadline for submitting the report – for the next reporting period (for example, the report for 2022 will be submitted in 2024 with the declaration for 2023). The fine for failure to submit a CIC report is proposed at the level of 100 subsistence minimums – UAH 268.4 thousand.
- Payment of tax on part of the adjusted profit of the foreign company. As a general rule, tax rates for controllers, legal entities and individuals are 18%. However, for individuals, reduced rates of 9% are applied, if part of the CIC’s profit is distributed in favor of the controller before the report is submitted, and the controller reflected it in his declaration, or for dividends received from Ukrainian legal entities that do not pay income tax. The rate of 5% is applied to dividends that KIK received from Ukrainian legal entities that pay income tax. In addition, military tax is paid at the rate of 1.5%.
It is worth considering that draft law No. 8137 provides for a large number of exceptions, when undistributed (adjusted) profit is exempt from taxation, in particular, if the following conditions are simultaneously met in relation to CIC:
- an agreement on the avoidance of double taxation or on the exchange of tax information has been concluded between Ukraine and the jurisdiction of registration (creation) of the CIC;
- The CIC pays income tax at an effective rate of not less than 13% or the share of passive income of the CIC does not exceed 50% of its total income.
The undistributed (adjusted) profit of the CIC is also not subject to taxation, if:
- the total combined income of all CICs of one controlling person does not exceed 2 million euros at the end of the reporting period;
- KIK is a public company, the shares of which are in circulation on one of the stock exchanges, the list of which is determined by the Cabinet of Ministers of Ukraine;
- KIK is a charitable organization that does not distribute profits between founders or members.
To summarize: in order to submit a report, it is necessary to obtain financial statements in the country of company registration, translate them, use the services of an auditor for their preparation, which is no longer a cheap pleasure, especially for a small business.
A separate issue in the context of the CIC also concerns the tax residency of the controller, i.e. the obligations towards the company arise from controllers who are tax residents of Ukraine.
However, if a person loses tax resident status in the middle of the year, does he have to report in the following year? There is no answer to this question in z/p No. 8137.
That is, on the one hand, we see that the reasons for paying tax on a part of the adjusted profit of the CIC apply to a few, but the penalties for ordinary failure to report are much greater than the possible tax revenue from paying the tax.
On the other hand, if filing a notification is not a complicated action in most cases, preparing a CIC report requires much more time and money. And the fines for not submitting the report are also quite substantial. And it does not matter at all: whether such a controller has an obligation to pay tax or not.
The legislation of most European countries is much more lenient towards taxpayers than in Ukraine, and usually the sanctions for non-submission of CIC reporting are no different compared to other similar violations.
Substantial penalties are already applied for violations related to non-payment of taxes. For example, in Great Britain, penalties are calculated by applying an appropriate percentage to the potentially lost budget revenue (ie the amount of unpaid tax).
Therefore, owners or co-owners of a foreign company should not delay in filing a CIC notice. Filing a report is not difficult enough, but if a violation is detected by the tax authorities, the controller risks receiving a significant fine, greater than for not submitting a report, even in the case when the income of the CIC is not subject to taxation in Ukraine at all.
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