Which Companies May Be Exempt from Paying Taxes on CFC Profits?

Ukrainian Controlled Foreign Company (CFC) legislation requires Ukrainian residents to declare and, in certain cases, pay taxes on profits earned by foreign companies under their control. However, not all CFCs are subject to taxation in Ukraine.

A Controlled Foreign Company is a foreign legal entity controlled by a Ukrainian tax resident — either an individual or a legal entity. Control may arise through ownership, joint participation, or actual management of the company.

When Are CFC Profits Exempt from Taxation in Ukraine?

1. Companies with an Effective Tax Rate Above 13%

If a foreign company pays corporate tax in its country of incorporation at an effective rate exceeding 13%, its profits may be exempt from additional taxation in Ukraine.

This mechanism is intended to prevent double taxation and is one of the most common exemption grounds.

2. Companies with Low or Insignificant Income

CFC profits may be exempt where:

• the combined income of all CFCs owned by the controlling person does not exceed the statutory threshold;
• the company does not conduct substantial business activity;
• or the company has minimal or no profit.

Supporting financial documentation remains essential even in such cases.

3. Companies Registered in Countries with Double Tax Treaties

If Ukraine has a double taxation treaty with the country where the CFC is registered, the controlling person may benefit from:

• foreign tax credits;
• exemption mechanisms;
• reduced tax burdens under treaty provisions.

Proof of foreign tax payments is generally required.

4. Public Companies

Companies whose shares are publicly traded on recognized international stock exchanges are generally excluded from standard CFC taxation rules.

Important Considerations

Even if CFC profits are exempt from taxation:

• the controlling person is usually still required to file CFC reports;
• reporting deadlines must be strictly observed;
• failure to file reports may result in substantial penalties;
• exemption grounds must be properly documented.

Common Mistakes

Businesses frequently make the following mistakes:

• assuming that no tax means no reporting obligation;
• incorrectly calculating the effective tax rate;
• failing to document foreign taxes paid;
• ignoring international tax treaties;
• failing to conduct proper legal analysis of ownership structures.

Practical Recommendations

To minimize risks, businesses should:

• conduct annual reviews of their foreign structures;
• verify eligibility for exemptions;
• maintain financial and tax records;
• submit reports on time;
• consult experienced tax lawyers and accountants.

Conclusion

Ukrainian CFC rules provide several legal mechanisms allowing exemptions from taxation of foreign company profits. However, these exemptions require careful legal analysis, proper documentation, and full compliance with Ukrainian tax regulations.

The Ukrainian Bar and Real Estate Association provides comprehensive legal assistance regarding CFC matters, including:

• foreign structure analysis;
• exemption eligibility assessments;
• CFC reporting preparation;
• international tax planning;
• protection of business interests in dealings with tax authorities.