Again about KIK: I don't want to file, but a fine

If your business is related to foreign economic activity or it is related to a company that is not a resident of Ukraine, then you must have heard that tax legislation obliges you to report all cases related to CIC . Let's remember in general what KIK is - it is a Controlled Foreign Company, registered in a foreign country or territory, which is recognized as being under the control of a natural or legal person - a resident of Ukraine . A controlling person is an individual or a legal entity - residents of Ukraine, who are direct or indirect owners (controllers) of a controlled foreign company. You can check whether you belong to KIK through our test by answering several questions.

Regulations on CICs have been in effect in Ukraine since 2022, according to which residents are required to submit a special notification and report to the Ukrainian tax authorities, as well as pay taxes on undistributed profits of CICs.

" Many Ukrainian entrepreneurs who created companies in foreign jurisdictions systematically ignored the need to notify the State Tax Service (SST) about their actions. They counted on the fact that there would be no exchange of information between the Ukrainian SST and the tax authorities of the countries where their companies are registered. Even the significant amount of the fine for violating this duty — UAH 805,200 (equivalent to 300 of the subsistence minimum for able-bodied persons) — did not cause them serious anxiety. However, the hopes of businessmen did not come true, and recently they have been receiving letters from the State Police with a notification of the discovered facts ownership of shares in foreign legal entities. These letters cover various foreign jurisdictions and are addressed not only to "controlling persons", but also to persons with less than 10% ownership share. " - Mykola Klymenko "Juscutum" head of the Accounting Support practice.

Tax base:

• The basic tax rate is 18% on the adjusted profit of the CIC.
• The rate is 9% if the profit of the CIC was actually distributed (i.e. dividends paid) by the time of submitting the report on the CIC and including this profit in the total income of the individual.

The adjusted profit of the CIC is determined in foreign currency and converted into hryvnias at the official rate of the NBU for the reporting tax period

What fines are provided by law in general:

• Failure to provide a report on the CIC by the controlling person entails the imposition of a fine in the amount of 100 subsistence minimums for an able-bodied person (hereinafter referred to as PM), established by law on January 1 of the tax (reporting) year. As of 2023, it is 2,684 hryvnias, so the fine is 268,400.00 hryvnias .
• Untimely submission by the controller of the report on CIC - entails the imposition of a fine in the amount of 1 PM, but no more than 50 PM for each calendar day of non-submission , equal to 2,684 hryvnias per day , but no more than 134,200.00 hryvnias .
• Failure to display information on existing CICs in the Report on CICs and/or failure to display information provided for in para. "d" - "z" 39-2.5 PKU - 3% of the amount of income of the CIC or 25% of the adjusted profit of the CIC , not reflected in the report on controlled foreign companies, but not more than 1,000 PM (2,268,400.00 UAH) .
• Failure to notify the controller within 60 calendar days of information about a change in the share of participation in the CIC or the exercise of actual control over the CIC, the creation of entities without the status of a legal entity - entails the imposition of a fine in the amount of 300 PM (805,200.00 UAH) .
• Non-submission (not in full) of documentation on transfer pricing, other copies of primary documents of the CIC at the request of the controlling body - 3% of the amount of income of the CIC for which the documentation was not submitted, but not more than 1000 PM ( 2,268,400.00 UAH) .

Payment of such financial sanctions (fines) does not release the taxpayer from the obligation to submit the Report and supporting documents provided for in Art. 39 notes 2 PKU .

We see that the fines are quite large, but we do not forget that according to the Transitional Provisions of the PKU , fines and interest during the determination and calculation of the profit of the CIC are not applied based on the results of the 2022-2023 reporting (tax) years, and controllers are exempted from administrative and criminal liability for violation of CIC rules based on the results of reporting periods for 2022-2023 .

In addition, the legislation provides grounds for exemption from taxation in accordance with Art. 39-2.4 PKU :

1) Between Ukraine and the foreign jurisdiction of the location (registration) of the controlled foreign company, there is a valid agreement on the avoidance of double taxation or on the exchange of tax information and any of the following conditions are met:

• KIK pays income tax at the effective rate, which is less than the basic rate by no more than 5% (that is, no less than 13%);
• The share of passive income does not exceed 50% of the total amount of income of KIK from all possible sources. To passive income according to para. 14.1.268 PKU include: interest on a current or deposit bank account, other interest (including discount income); the income paid by the company managing the assets of the collective investment institution on the placed assets in accordance with the law; interest (discount) received by the bond owner from their issuer; royalties; dividends;
• The share of passive income of the CIC is more than 50% of the sum of the CIC's income from all sources, such income is recognized as active , provided that the controlled foreign company: actually performs essential functions, bears risks and uses assets in operations that lead to the receipt of relevant active income; has the necessary resources to perform the specified functions, manage risks and use assets (qualified personnel, fixed assets owned or used, sufficient equity capital, etc.).

2) The total combined income of all CICs of the controlling entity is less than 2 million euros at the end of the reporting period.

3) KIK is a public company whose shares (shares) are in circulation on a recognized stock exchange . The list of stock exchanges and requirements for recognition of shares (shares) of public companies as being in circulation on the specified stock exchange are established by the Cabinet of Ministers of Ukraine.

4) KIK is an organization that, in accordance with the legislation of the relevant foreign jurisdiction, carries out charitable activities and does not distribute income in favor of its founders (participants).

In addition, a foreign company that has received the status of a tax payer - a resident of Ukraine is not recognized as a controlled foreign company.

But do not forget that exemption from taxation does not give grounds for not submitting a report on KIK!

Therefore, we advise you to analyze as soon as possible whether you have a company or a structural unit that can be a CIC and, if necessary , notify the controlling tax authority about it , because, as you can see, the fines are really big. In addition, the field of KIK is not easy, so seek the help of qualified lawyers or accountants to avoid making a mistake, which can be very expensive!

attorney Ferenchuk Denys Olehovych

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