Controlled foreign companies and business in Poland – what will change from January 1, 2021 for residents of Ukraine?
On January 1, 2021, amendments to the Tax Code of Ukraine will enter into force, introducing the institution of controlled foreign companies (CFC) into the law system. The new provisions of the code will apply only to natural and legal persons who are tax residents of Ukraine.
Taking into account the increase in economic and business ties between Ukraine and the Republic of Poland in recent years, these changes will affect a significant number of people whose center of vital interest is in Ukraine and at the same time, directly or indirectly, doing business in Poland.
From the point of view of the new provisions of the Tax Code, it is important to determine the controlling person (natural or legal), who will be subject to a number of obligations related not only to submitting reports, but also to the payment of a new type of CFC income tax in Ukraine.
A person is considered a controlling one if it:
1. Holds directly or indirectly over 50% of shares / stocks in the share capital of a foreign legal entity,
2. Directly or indirectly owns more than 25% (in the years 2021-2022, later – more than 10%) of shares / stocks in the share capital of a foreign legal entity, with a total of over 50% of shares / stocks of this legal entity belonging to tax residents of Ukraine,
3. Independently or jointly with other tax residents of Ukraine, exercises actual control over the CFC (it may issue orders to the authorities of a foreign legal entity, has control over the funds accumulated in the company’s bank account, or is authorized to make significant transactions on behalf of that legal entity, etc.),
At the same time, it should be noted that if none of the tax residents of Ukraine owns or controls a stake of 25% or more, and is not considered itself a controlling person, then under the new regulations all such persons will be considered controlling persons with all the resulting consequences.
Controlled foreign companies
Controlled foreign companies are not only legal entities, but also entities that do not have legal personality (trusts, partnerships, foundations, etc., according to the list approved by the Cabinet of Ministers of Ukraine). Thus, the new rules will also apply to some Polish partnerships, the profit of which is subject to income tax (S.K.A. and from May 1, 2021 also – sp.k. and some sp.j.).
Subject of taxation
The subject of taxation with the personal income tax (corporate income tax) of the controlling person is a part of the CFC’s income proportional to the share held or controlled by such natural person (legal person) as of the last day of the relevant reporting period for which the CFC’s income is calculated, and which :
- is included in the total annual taxable income of the controlling person, or
- according to the results of the tax year, it increases the subject of taxation with the corporate income tax of the controlling person.
The income of a foreign controlled company is not included in the total taxable income and is not subject to corporate income tax of the controlling person if the following conditions are met:
- there is an agreement on the avoidance of double taxation or on the exchange of tax information between Ukraine and the foreign jurisdiction of the seat (registration) of the controlled foreign company (such an agreement was concluded between Ukraine and Poland in 1993 and is still valid), and
one of the following conditions is met:
- the controlled foreign company actually pays income tax at an effective rate that is no less than the base rate of corporate income tax in Ukraine (18%) or less than that rate by no more than five percentage points (i.e. less than 13%) or
- the share of passive income of the controlled foreign company does not exceed 50%of the total income of the controlled foreign company from all sources.
Notwithstanding the foregoing, CFC’s adjusted income is not taxable and not subject to the controlling party’s corporation tax if any of the following conditions are met:
- total income of all controlled foreign companies of one controlling person from all sources according to the financial statements does not exceed the equivalent of EUR 2 million at the end of the reporting period;
- a controlled foreign company is a public company which stocks (shares) are listed on the stock exchange;
- a controlled foreign company is an organization that, in accordance with the legislation of the competent foreign jurisdiction, carries out a charitable activity and does not make payments to its founders (members).
CFC income tax rate
Depending on the form in which the tax resident of Ukraine obtains income from the controlled CFC as well as depending on whether the controlling person is a natural or legal person, different tax rates apply, ranging from 5% + 1.5% military tax and ending at 18% + 1.5% military tax.
The amendment also introduced two forms of reporting controlled foreign companies, namely:
- a report on a controlled foreign company,
- notification of receipt or termination of participation in a controlled foreign company.
Report of the controlled foreign company
The controlling person is obliged to submit to the supervisory body a report on the controlled foreign company at the same time as submitting the annual property and income declaration (by 1 May) for the relevant calendar year.
The report on the controlled foreign company shall be accompanied by duly certified copies of the financial statements of the controlled foreign company confirming the amount of income of the controlled foreign company for the reporting (tax) year.
Interestingly, according to Polish law, the approval of financial statements may take place no later than 30 June of the year following the reporting year, therefore the above-mentioned rules approved by Ukrainian legislation actually shorten this period for companies controlled by tax residents of Ukraine.
Notification of receipt or termination of participation in a controlled foreign company
A natural person – a tax resident of Ukraine or a legal person – tax resident of Ukraine is obliged to inform the supervisory authority about:
- any direct or indirect acquisition of share(s) in a foreign legal person;
- establishment, creation or purchase of property rights to participate in the assets, income or profits of an entity without legal personality;
- any disposal of a share in the capital of a foreign legal person or termination of control over a foreign legal person;
- liquidation or sale of property rights to participate in the assets, income or profits of an unincorporated entity.
The notification is sent to the supervisory body within 60 days from the date of acquisition (commencement of actual control) or disposal (termination of control), unless CFC is a public company.
Penalties for failure to submit reports or failure to notify about the acquisition (sale) of rights in the CFC are significant and start from UAH 200,000.
The impact of CFC law on business in Poland
In conclusion, it should be noted that at the time of writing this text, the corporate tax rate in Poland is 19% or 9%. The lower rate applies if the company is a small taxpayer and its annual income does not exceed EUR 1.2 million (from January 1, 2021 – EUR 2 million).
Thus, in the current legal status, the CFC taxation rules will primarily apply to tax residents of Ukraine who control several Polish companies whose profits are subject to a preferential 9% rate, and the total income of all CFCs (Polish or other foreign) of that controlling person from all sources, financial statements exceeds the equivalent of EUR 2 million at the end of the reporting period.
In order not to get confused by the enormity of rules and exceptions related to the new legal institution CFC, and to determine how the new provisions of the Ukrainian Tax Code will affect your business in Poland, it is worth consulting these issues with specialists. The lawyers of our law firm Dudkowiak Kopeć Putyra sp.j. (Poland) in cooperation with our foreign partner – a lawyer from Ukraine – Volodymyr Misechko, will help you define the exact scope of obligations imposed on you by the Ukrainian legislator, determine the related risks and find the optimal model for your business in Poland, which will avoid possible risks in future.
On December 17, 2020, the parliament of Ukraine adopted the Act 4065, which postpones the entry into force of the CFC Act for one year, but at the time of writing this law has not yet been signed by the President of Ukraine and has not been published. This is good news for those covered by the new CFC Act as it gives you more time to optimize your overseas operations to prepare for the changes ahead.