CFC law entailing more reports and taxes for startups and businesses draws criticism

The President of Ukraine has signed a law introducing the concept of controlled foreign companies (CFCs), which requires Ukrainian owners to register their CFCs with the tax authorities and pay taxes.

Concerning taxable foreign assets, the law comes into force on January 1, 2021, so there is still time to prepare.

AIN.UA’s editor has asked lawyers, entrepreneurs, and investors about what is going to change for the venture capital investment industry.

Why does Ukraine need the CFC law?

According to the lawyer Yuriy Kornaga, a partner at Axon Partners, the CFC regulations have not come as a surprise for Ukrainians. The introduction of CFC rules in Ukraine was anticipated back in 2017. At that time, Ukraine committed to adopting the package of the Base Erosion and Profit Shifting (BEPS) Action Plan in 15 actions.

The idea behind CFC rules is to tackle tax migration. Any business in any jurisdiction should get a tax rate that is commensurate with its “home” rate. If it relies on low-tax jurisdictions, let it relocate physically, rather than make a virtual escape.

What is a CFC?

A controlled foreign company is any legal entity registered abroad and controlled by a controller (see below). For a CFC, it is possible to have no legal entity status; these can be partnerships, trusts (except for blind ones), funds. Even a joint venture agreement without creating a legal entity can fall under the definition of a CFC.

“It doesn’t matter if a CFC is registered offshore or in a regular jurisdiction, in the U.S. or Estonia, if it is a product company or an outsourcing company, it is still a CFC,” the legal expert comments.

Who is a controller?

A controller is a Ukrainian resident (an individual permanently residing in the country or a legal entity registered here) that owns directly or indirectly:

  • a share in a CFC which is more than 50%, or
  • a share in a CFC which is more than 10%, provided that several controllers own shares in the CFC making more than 50% in total (this applies to situations where shares in a company are held by several friends or relatives; if there are several controllers, they are residents, and their joint share exceeds 50%, the provisions of the law do apply), or
  • independently or together with other related Ukrainian residents perform effective control over the CFC (meaning that a person, or a legal entity, can order the CFC, for example, to make a payment or conclude an agreement; can hold negotiations over the CFC’s deals; make transactions with the CFC’s banking accounts or freeze them, etc.).

“Holders of options for less than 10% or similar exit bonuses are not controllers. If, though, the amount of the option or bonus is more, the resident becomes a controller not since, for example, the signing of the option agreement, but when he or she buys the option in full or proportionally, or secures the rights for the exit bonus,” says the lawyer.

What must controllers do now?

They have to report about having a CFC to the tax office. And pay taxes on their profits. The reporting period is one year.

Controllers should file such a report at the same time as their annual income statement (the deadline for individuals is April 30, 2021) or their income tax return (the deadline for legal entities controller is March 1, 2021).

What taxes do controllers pay?

The tax is levied on the part of the CFC’s adjusted income for the period under review, which is proportionate to the controller’s share. It should be calculated by the controllers themselves, based on the CFC’s financial statement.

It is important to remember that if the total income from all the controller’s CFCs, according to their financial records, does not exceed EUR 5 million, no such tax is payable.

Individuals pay the personal income tax, and legal entities, corporate income tax.

For instance, there is a CFC in the form of an outsourcing or product company registered in Cyprus. Its controller controls a 60% share. The company has received an annual revenue of $2 million, the profit is $1 million. The adjusted profit is the profit minus the tax of 12.5% (CIT) payed in Cyprus. The tax base for the controller should be $525,000 (60% of $1 million minus 12.5% of this sum). The controller must pay the personal income tax of 18% and the military levy of 1.5% on it.

Those who are not filing reports and not paying taxes will be fined. For example, a non-filed report will cost UAH 210,200 (about $7,800), failing to report the acquisition of a share in a CFC, UAH 630,600 (about $24,500) for each case.

Showing what has changed by examples

The full analysis of the changes has been provided to AIN.UA by Sayenko Kharenko’s Tax Practitioner Svitlana Musiyenko and Senior Lawyer Kateryna Utiralova.

Situation 1. A Ukrainian beneficiary owns a foreign company and has an account in a foreign bank. From January 1, 2021, the taxation of controlled foreign companies (CFCs) is introduced. This means:


  • The Ukrainian beneficiary owns the foreign company and has an account in a foreign bank, all while:
    • he or she spends money from the account on personal needs, paying for travel, clothes, medical treatment; he or she uses the company as a “piggy bank”: to store currency safely and anonymously, to “secretly” own real estate in Ukraine and all over the world;
    • in Ukraine, no one knows about the company, because the registers of shareholders and beneficiaries are closed, and even if they are open, the use of nominals is common;
    • in Ukraine, no one knows about the bank account because of bank secrecy, no one sees the transaction history, no one knows the balance.


  • The Ukrainian beneficiary still owns the foreign company and has an account in a foreign bank, but:
    • the foreign company is known in Ukraine, because:
      • the information is disclosed by the individual in his or her report, otherwise, there is a fine;
      • the tax office is interested in discovering the CFC because the failure to file the report means a fine and additional payments to the state authorities;
      • financial institutions in Ukraine invariably provide the data on beneficiaries to the tax authorities.
    • Soon (since 2021–2022), the CRS international data exchange will start working, and the tax office will be receiving information about accounts set up by Ukrainian residents in other countries. The tax office will see the account balance and where the money has gone; the authority will see where you have got any foreign companies.

What about paying taxes in this situation?


The beneficiary does not pay taxes anywhere.

At the level of the foreign company, there is no tax because it is offshore, and if not, then the tax is minimal, according to the local rules. At the level of the Ukrainian company or the Ukrainian beneficiary, the tax is not paid because there is no legal obligation to do it, and Ukraine does not know that there is money for paying it.


  • The Ukrainian beneficiary files a report concerning the foreign company to the tax office and calculates the taxation amount to pay in Ukraine.
  • He or she pays the income tax (according to his or her share in the profit of the foreign company) at a rate of 19.5% (the income tax of 18% + the military levy of 1.5%). There are exceptions, where you do not have to pay the tax, but you must file the report to the tax office anyway.

Situation 2. A Ukrainian company conducts a transaction with a foreign company.


The transaction expenses are recorded according to the accounting regulations in Ukraine.


There is a concept of a “business goal” for the transaction.

If the tax office can prove the absence of a “business goal,” it will have the right to disregard the transaction amount when calculating the Ukrainian company’s taxable income.

What exactly must the tax office prove?

That the transaction’s principal goal is tax evasion, or that, under the same circumstances, another Ukrainian company would not be ready to conduct similar transactions with an unrelated company.

Situation 3. A Ukrainian company pays dividends, interest, or royalties to a foreign company, theoretically speaking, from Cyprus (from a jurisdiction covered by the Convention for the Avoidance of Double Taxation).


The reduced tax rates under the Convention are always applied.


There is the “principal goal” test. If the Ukrainian company makes a payment with the purpose of receiving a reduction, the Convention will not be applied.

Additionally, it was defined more accurately what a beneficiary owner of income on payments is: an individual who is a “beneficiary party” and has the right to “effectively dispose of the income.”

If the receiving foreign company is not a beneficiary owner, the reduction under the Convention will not apply.

Situation 4. A Ukrainian individual sells a foreign asset to a non-resident which is a related party or a company from a low-tax jurisdiction.


There are no restrictions on the amount of income that the Ukrainian party should get from the acquisition of the asset.


The Ukrainian party must calculate its taxable income as being not below the level of the “arm’s length price.” In effect, this is about the market price. If the party buys a foreign asset, then the expenses must also be not above the “arm’s length prices.”

Situation 5. A Ukrainian company enters into transactions with a related foreign company, and such transactions are subject to transfer pricing control in Ukraine.


The Ukrainian company pays standard taxes. In case it turns out that, according to the transfer pricing regulations, the company’s prices are inconsistent with the “arm’s length principle”, the company will pay additional income taxes.


From January 1, 2021 (if the date is not postponed), the concept of a constructive dividend is introduced.

Equated with such dividends is the difference between the actual transaction price and the price calculated according to the “arm’s length principle,” under the transfer pricing regulations.

This means that in case it turns out that, under the transfer pricing regulations, the company’s prices are inconsistent with the “arm’s length principle,” the company will not only pay extra income tax but the withholding tax as well. That is the withholding tax at the rate of 15% (or at a reduced rate, if applicable under the convention) on the constructive dividend amount.

What do investors and entrepreneurs think of it?

Many investors and entrepreneurs explicitly say and write that the new law will cause a wave of relocations from the country.

Denys Dovhopoliy, founder of GrowthUP Group, Unicorn Nest:

There is nothing bad about the new law. The bad thing is that it was signed about five years earlier than it should be. We need to put the economy in order, to grow the cow before we start milking it. The logic is very strange here. All those in power now will be severely affected by this law.

And, well, yeah, the already strong emigration sentiment is going to get another strong push now. And those pushed will be the people creating the economy now. And I don’t mean just the IT guys :); the citizenship and residency of this country have been devalued to almost zero for the entrepreneurially active segment of the population.

The nominals will raise prices for Ukrainians. If you know what I mean.

Igor Pertsya, a partner at TA Ventures:

This is more of an ideology issue for me. There was an unstated social pact between the state and the entrepreneurs: we leave you alone, taking a small-percentage tax, you stay here without complaining about the absence of good roads, decent healthcare, etc. Now it has all been downplayed. When owning a foreign company, Ukrainian entrepreneurs will consider obtaining foreign citizenship or residency.

For us as a fund, nothing has changed. We can have 5% in a startup, but the person who founded business can have a 100% share. So, many founders of Ukrainian projects come within the provisions of this law. This means that many startuppers who have lived in Ukraine will say, “Oh, what the hell!” and then just pack and move.

Andriy Kryvorchuk, founder of investment company Adventures Lab

We still don’t fully understand what the final version of the law will be. 

Do we have to pay taxes? Definitely, yes. But let’s find out why most of the Ukrainian business (especially product companies) does not accumulate their income in Ukraine: 

  1. Keeping money in Ukraine is a risk (tomorrow, the bank will collapse, or raiders will come) 
  2. Keeping an intellectual property in Ukraine is a risk (tomorrow, the Pechersk Court will decide that your work belongs to someone else).

And this is just the tip of an iceberg. I dream of the day when Ukrainian entrepreneurs will choose Ukraine as their main jurisdiction. And they’ll refuse other options. But today, the Ukrainian jurisdiction is one of the least protected, clear, and simple.

Our lawmakers obviously don’t understand that: 

  1. Today, the world is at its most violent war between jurisdictions for every dollar of business.
  2. Businesses will incorporate companies and pay taxes where they feel safe.
  3. In a global world, you can’t tie anyone to you anymore.

Therefore, without improving the jurisdiction (British law, ease of doing business, the safety of funds, etc.), nothing will change. And there will be no more money in the treasury not from this law, or dozens of others.

Dmitri Lisitski, co-founder of Influ2

The law has taken a toll on the prospects of Ukrainian startups. Similar laws exist in other countries, but they are targeted at owners of large businesses hiding their assets in offshore jurisdictions. As usual, our lawmakers got everything mixed up! As a result, every Ukrainian startup must now file a tax return on its ownership of a mythical business. 

I do not doubt that the fact of reporting ownership of a foreign company makes technological entrepreneurs vulnerable in the realities of Ukraine. So, dear startupers, wait for fines, there is no doubt that the tax authorities will try to milk “rich tech specialists.”

The only sensible solution is to change your tax residency. In other words, when launching a startup, you have to plan the relocation without delay, which has many advantages. Together with the relocation, the entrepreneur gets access to funds, integration into the ecosystem, access to markets, so this is the final argument not to try to do business from Ukraine.

Alternate opinion: not everything is so terrible

If we want to move toward Europe, we need to practice paying taxes, says Lyubomyr Ostapiv, financial consultant, and partner at In his opinion, the law has some good sense:  

“When I started the first American company for IT business in 2013, I found out about FBAR. Simply said, you will pay a $10,000 fine if you did not file a separate report on the foreign account of an American resident. And, by the way, the Internal Revenue Service has the right to write off the money from the bank account if you owe it. I am sure that the CFC owners will figure out how to file reports and pay 19.5% of the profit. Of course, there may be excesses with the State Fiscal Service of Ukraine, and this is the biggest risk factor. For those who want to live in this country, it is important to “teach” the State Fiscal Service to interact with taxpayers within the law.”

According to Vlad Yarovoi, founder of RIKK, the law is not as bad as everyone says, “Even if your company is a CFC, most likely nothing will change for you, except the need to notify the tax authority and submit reports.”

The lawyer notes that there is no risk for business owners if:

  • The total income from all CFCs does not exceed 2 million euros. Startupers and all small/medium businesses breathe a sigh of relief, says the lawyer.
  • If the company is public and traded on the exchange.
  • If there is an Avoidance of Double Taxation Agreement between Ukraine and the country where the company is incorporated and:
    • or the entrepreneur pays at least 13% tax (Bulgaria, Hungary, Cyprus, and Estonia – not applicable);
    • part of the passive income of the company is not more than 50%.

“The last point also applies to large businesses that are active. The only fly in the ointment is that the company must have real opportunities to perform all operations (personnel, capital, office). So, we have to create a certain substance,” says the lawyer.