Do You Need to Notify the Tax Authorities About an Exemption from CFC Reporting?

Ukrainian Controlled Foreign Company (CFC) legislation contains numerous rules regarding reporting obligations for Ukrainian tax residents. One of the most common questions is whether a taxpayer must separately notify the State Tax Service of Ukraine if a foreign company qualifies for an exemption from full CFC reporting.

What Is CFC Reporting?

CFC reporting is the obligation of a Ukrainian resident to disclose information regarding foreign companies that they own or control. The purpose of these rules is to ensure transparency of international ownership structures and proper taxation of foreign profits.

When Can a CFC Be Exempt from Reporting?

Ukrainian tax legislation provides several situations where a CFC may qualify for exemption from full reporting or taxation.

Common exemption grounds include:

• the company had no business activity and generated no income;
• the company is taxed abroad at an effective tax rate exceeding the statutory threshold;
• the combined CFC income does not exceed the legal limit;
• applicable double taxation treaties apply;
• other statutory exemptions established by Ukrainian tax law.

Is Separate Notification Mandatory?

In most cases, Ukrainian legislation does not expressly require a separate notification regarding exemption from reporting obligations. However, from a practical perspective, tax lawyers strongly recommend maintaining documented communication with the tax authorities.

The safest approach is usually to submit:

• simplified reporting;
• zero reporting;
• explanatory statements confirming exemption grounds.

Why Is This Important?

1. Reducing the Risk of Penalties

A complete absence of any reporting may be interpreted by the tax authorities as a violation of the controlling person’s obligations.

2. Confirming the Legality of the Exemption

If the tax authorities initiate an audit, the taxpayer must prove that valid exemption grounds existed.

3. Demonstrating Transparency

Proper communication with the tax authorities reduces the likelihood of disputes, audits, and additional requests for documentation.

What Documents Should Be Retained?

Businesses should maintain:

• financial statements of the foreign company;
• evidence of inactivity where applicable;
• proof of foreign tax payments;
• extracts from foreign corporate registries;
• corporate documents;
• effective tax rate calculations;
• documents supporting treaty protection.

Practical Recommendations

To minimize risks, businesses should:

• review their CFC structures annually;
• verify eligibility for exemptions;
• submit at least simplified or zero reports where appropriate;
• properly document inactivity;
• consult tax lawyers before deciding not to file reports.

Conclusion

Although Ukrainian law does not always require a separate notification regarding exemption from CFC reporting, submitting simplified or zero reporting is generally considered the safest approach for protecting business interests.

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

• foreign structure analysis;
• assessment of reporting obligations;
• preparation of simplified and full reports;
• international tax planning;
• protection of business interests in dealings with tax authorities.