The foreign business of Ukrainians is under the scrutiny of the tax authorities

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In the early 2010s, the world faced the problem of a decrease in tax revenues, which led to an active fight against tax evasion and the transfer of money offshore.

The result of this process was the creation of the BEPS (Base Erosion and Profit Shifting) initiative.

BEPS currently contains 15 measures covering different areas of combating aggressive tax planning.

These include, in particular, the improvement of transfer pricing rules, the prevention of tax avoidance through the use of double taxation conventions, the taxation of the income of controlled foreign companies (CFCs), the exchange of information and many other measures. Ukraine has been an active participant in BEPS since January 1, 2017.

In 2022, the Tax Code of Ukraine was supplemented with the concept of a controlled foreign company (CFC). From now on, Ukrainian companies and natural persons who own or control foreign structures are obliged to report on the presence of CICs and their profits and to pay taxes on them in Ukraine.

The possibility of tax-free liquidation of foreign companies, tax amnesty, and growing public awareness should encourage Ukrainian owners of foreign companies to voluntarily legalize on fairly favorable terms.

But in reality, such disclosure was on the conscience of taxpayers themselves, as tax authorities had limited tools for independent verification of information on foreign income and assets of Ukrainians.

What is How does CRS work?

For both purposes, the tax office had to have a significant amount of information from other countries. To close this gap, in August 2022, Ukraine joined the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA CRS), and in November, the Multilateral Competent Authority Agreement on the Exchange of Reports CbC (MCAA CbC).

Currently, 122 states – including Ukraine – have joined the CRS Agreement.

To ensure compliance with the CRS standard (Common Standard on Reporting and Due Diligence for Financial Account Information), Ukraine has signed relevant international agreements with more than 100 partner countries, including members of the European Union and G20 countries.

These agreements enable the tax authorities of different countries to exchange information about residents who have foreign assets and income.

In the spring of 2023, the Verkhovna Rada finally introduced standard CRS. First of all, this means that from July 1, 2023 Ukrainian financial institutions are required to apply the CRS standard during the comprehensive audit of financial accounts and to submit information to the tax authorities about the accounts of persons who are tax residents of other countries.

It is foreseen that in 2024 the deadline for submitting a report on the accounts of foreigners will be July 1, 2024. After the actual start of the exchange of information, the tax authorities of Ukraine will send this information to the country of tax residence of the account holder.

At the same time, after the introduction of the CRS standard, Ukrainian tax officials will begin to automatically receive information about foreign assets of Ukrainian residents, in particular, account numbers, data on received income from commercial activities, income from passive investment operations, account balances, etc.

Financial information will include data not only on funds in current accounts, but also on securities in accounts and on deposit accounts in foreign banks.

Accordingly, Ukrainian tax authorities will be able to assess additional taxes if, for example, foreign assets were not voluntarily declared in Ukraine or the value of assets or profits in the tax declaration were understated.

But information about the accounts of legal entities, on which the aggregate (that is, on all accounts of one company) less than 250 thousand US dollars is stored, will not need to be exchanged within the framework of CRS.

No such limit has been established for individuals, and this means that data on all accounts of Ukrainian residents in foreign financial institutions can be exchanged.

Separately, it should be noted that if the information on a certain account is already classified as accountable according to the CRS standard, reducing the amount of funds on such an account will not change its status.

What should residents of Ukraine who have foreign bank accounts or are controllers of CICs do?

The exchange of financial information will concern residents of Ukraine who have foreign accounts, in particular, who are the beneficiaries (controllers) of foreign companies (DPS will receive financial information about the corporate accounts of such companies).

In addition to companies, the exchange of financial information will concern trusts, partnerships, permanent representative offices and other entities that do not have the status of a legal entity and whose beneficiaries are residents of Ukraine.

Financial information will be collected and transmitted not only by foreign banks, but also by brokers, investment funds, insurance companies, providers of trust and secretarial services, etc.

It is equally important that the DPS will be able to apply penalties for failure to notify on the acquisition of a share in a foreign company, or on the start/termination of actual control or on the alienation of a share in a foreign company, namely the imposition of a fine in the amount of 300 units of the subsistence minimum for each such fact (as of January 1, 2023, this is 805,200 hryvnias).

Is it not too late?

The first exchange of financial information was planned in Ukraine in 2024 for 2023. However, today’s realities make their adjustments.

The DPS will not be able to transfer financial information collected in Ukraine to foreign tax authorities during martial law. Also, there is no information yet when the DPS will be able to practically receive information about foreign accounts of residents of Ukraine.

To date, Ukraine has prepared the necessary legislative framework for the introduction of such an exchange, the matter remains with the software for the safe transfer of such an array of sensitive information. Physically, Ukraine will be able to start exchanging information only after the end of martial law.

It is important to note that the introduction of CRS is a significant step in increasing the transparency of the global financial system. CRS will minimize opportunities for tax evasion and will provide more effective control over the movement of capital and income of residents of Ukraine.

At the same time, its introduction will create additional challenges for businesses with foreign assets and income.

Therefore, although the time of the start of the automatic exchange of information is still unclear, we advise owners of foreign companies and accounts not to wait for a personal invitation from the tax authorities, but to prepare the necessary information in advance and properly declare foreign assets and income in Ukraine.

Co-author: Anastasia Furmaniuk, junior lawyer Sayenko Kharenko

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