Common Mistakes in CFC Reporting and How to Avoid Them

Since 2022, Ukrainian taxpayers have been required to submit reports regarding Controlled Foreign Companies (CFCs). Despite businesses gradually adapting to the new requirements, many controlling persons still make mistakes that may lead to penalties, tax audits, and even criminal risks.

1. Failure to Submit or Late Submission of Reports

This is the most common violation and may result in administrative liability under Article 120.7 of the Tax Code of Ukraine.

Possible consequences include:

• substantial fines for each undeclared CFC;
• increased attention from tax authorities;
• additional audits and inspections.

What to do:

• establish internal deadlines earlier than official ones;
• use automated reminders;
• prepare financial statements and supporting documents in advance.

2. Incorrect Determination of the Controlling Person

Many business owners mistakenly believe that control exists only when holding more than 50% of a company. However, Ukrainian law recognizes other forms of control, including:

• joint ownership;
• indirect participation;
• actual management of the company;
• authority over accounts and decision-making.

What to do:

• conduct a legal review of the corporate structure;
• analyze direct and indirect control;
• properly document ownership structures.

3. Lack of Financial Statements for the CFC

Reliable financial statements are required to prepare a CFC report. Their absence constitutes a reporting violation.

What to do:

• request statements from foreign accountants or auditors in advance;
• ensure proper translation of documents;
• adapt financial statements to Ukrainian reporting requirements.

4. Ignoring Currency Control Rules

Transactions between Ukrainian residents and CFCs are subject to financial monitoring. Undisclosed transfers or profits may lead to:

• additional tax assessments;
• banking compliance reviews;
• account freezes.

What to do:

• notify banks about the existence of the CFC;
• properly document international payments;
• retain supporting documentation.

5. Failure to Declare CFC Profits

The controlling person must include their share of the CFC’s profits in their annual tax return. Failure to do so may result in:

• additional taxes;
• penalties;
• late payment interest.

What to do:

• analyze possible tax exemptions;
• review the effective foreign tax rate;
• seek professional tax advice in advance.

6. Improperly Prepared Documents

Even formal mistakes may create problems during tax audits.

Common issues include:

• incorrect dates;
• inaccurate details;
• unauthorized signatures;
• inconsistencies between documents.

What to do:

• carefully review documents before submission;
• involve experienced legal and tax professionals;
• maintain a complete archive of all filings and confirmations.

Practical Recommendations

To minimize risks, businesses should:

• prepare CFC financial statements in advance;
• regularly review ownership and control structures;
• avoid last-minute reporting;
• keep all supporting documentation;
• consult lawyers and tax advisors when necessary.

Conclusion

CFC reporting is not merely a formality — it is a serious tax obligation. Mistakes or delays may result in significant financial and legal consequences.

Proper organization, professional support, and timely preparation can substantially reduce risks and help avoid disputes with tax authorities.

The Ukrainian Bar and Real Estate Association provides comprehensive support regarding CFC compliance, including:

• corporate structure audits;
• tax risk analysis;
• preparation of CFC reports;
• assistance during audits;
• protection of business interests.