Controlled Foreign Companies: a New Draft Law on BEPS Action Plan
The Ministry of Finance and the National Bank of Ukraine have published a comprehensive draft law “On Amendments to the Tax Code of Ukraine for Implementing the Plan on Base Erosion and Profit Shifting”. The draft law implements major steps of the Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan). These steps, among other things, include rules on taxation of controlled foreign companies (CFC).
A legal entity qualifies as a CFC if it:
- is registered in a foreign state (territory); and
- is controlled by an individual who is a resident of Ukraine.
In some cases trusts, partnerships, funds and other entities lacking legal personality may also qualify as CFCs. An individual who is a resident of Ukraine is considered the controller of a CFC if he/she:
- holds 50% or more of the shares in a CFC; or
- holds 25% in a CFC and, jointly with other Ukrainian residents, holds 50% or more of the shares in a CFC; or
- solely or with other Ukrainian residents exercises de facto control over a CFC.
A controller is obliged to include the amount of the adjusted profit of a CFC into his/her gross annual taxable income.
The profit of a CFC is exempt from taxation in case all the following conditions are met:
- the CFC is registered in a state with which Ukraine has a double taxation treaty or a treaty on exchange of tax information;
- the CFC is registered in a state which is not included into the list of states (territories) approved by the Cabinet of Ministers of Ukraine (mainly the jurisdictions with the corporate income tax rate of 13% or lower); and
- the CFC is paying a corporate income tax at the effective rate of not less than 13%, or no more than 50% of its income consists of passive income.
The profit of a CFC is also exempt from taxation in Ukraine if the total income of all CFCs controlled by one Ukrainian resident is less than EUR 1 million, or the CFC is a public company.