CFC Exemptions: How to Legally Avoid Full Reporting Obligations

Since the Controlled Foreign Company (CFC) rules came into force in Ukraine, Ukrainian residents owning foreign businesses have become obligated to submit annual CFC reports. However, Ukrainian legislation provides several situations where a foreign company may not qualify as a CFC or where the controlling person may benefit from exemptions and simplified reporting.

What Is a CFC?

A Controlled Foreign Company is a legal entity registered outside Ukraine that is controlled by a Ukrainian resident — either an individual or a legal entity.

Reporting obligations arise if:

• the resident owns more than 50% of the company;
• or owns more than 10% while several Ukrainian residents jointly control more than 50%;
• or exercises actual control over the company.

When Is a Company Not Recognized as a CFC?

1. Public Companies

Companies whose shares are traded on recognized international stock exchanges may fall outside the CFC rules.

2. Non-Profit Organizations

Charitable foundations and other non-profit entities registered in transparent jurisdictions are generally not treated as CFCs.

3. Companies with Limited Income

Under the Tax Code of Ukraine, exemptions may apply if:

• the combined income of all CFCs of the controlling person does not exceed the statutory threshold;
• or the company conducts predominantly active business operations.

When Can Full Reporting Be Avoided?

1. No Business Activity

If the company had no business activity and generated no income, simplified reporting may be possible.

2. High Effective Tax Rate

If the foreign company pays taxes abroad at an effective rate exceeding the threshold established by Ukrainian legislation, the CFC profit may be exempt from taxation in Ukraine.

3. Double Tax Treaty Protection

Where Ukraine has a double taxation treaty with the country of incorporation and the profits are already taxed abroad, certain exemptions may apply.

Important Note

Even when exempt from taxation, the controlling person is usually still required to notify the Ukrainian tax authorities and submit the appropriate reporting forms.

Failure to comply may result in:

• financial penalties;
• additional tax assessments;
• audits and investigations;
• increased financial and legal risks.

Practical Recommendations

To reduce risks, businesses should:

• conduct a review of the corporate structure;
• verify eligibility for exemptions;
• properly document exemption grounds;
• maintain financial and corporate records;
• seek legal and tax advice in advance.

Conclusion

Ukrainian law provides several lawful mechanisms for exemption from full CFC reporting obligations. However, these exemptions require proper application, supporting documentation, and timely compliance with tax requirements.

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

• business structure analysis;
• exemption eligibility reviews;
• preparation of reporting documents;
• tax planning;
• protection of business interests.