Author: Aliona Yevtushenko, lawyer at F&P
Foreign companies entering the Ukrainian market are exposed to a number of tax-related risks that can significantly affect their operations and financial performance. Awareness of these risks and proper tax planning are essential for ensuring business stability and compliance with Ukrainian legislation.
1. Controlled Foreign Companies (CFCs): New Challenges for Investors
Since 2022, Ukraine has enforced regulations regarding Controlled Foreign Companies (CFCs). Ukrainian tax residents who directly or indirectly own shares in foreign entities must report this to tax authorities and submit annual reports on such companies’ activities. Failure to comply with these obligations may result in substantial penalties, amounting to 300 times the subsistence minimum for each violation (tax.gov.ua).
In addition, under Subparagraph 39².6.3 of Paragraph 39².6 of Article 39² of the Tax Code of Ukraine, banks and other supervisory institutions submitted over 9,800 notifications to the State Tax Service, indicating that Ukrainian residents own shares in foreign legal entities.
2. Principal Purpose Test and Thin Capitalization Rules
As part of implementing OECD BEPS initiatives, Ukraine introduced the Principal Purpose Test (PPT). According to this test, tax treaty benefits may be denied if one of the main purposes of a transaction is to obtain such benefits. Furthermore, thin capitalization rules restrict the ability of companies to reduce their taxable income by using excessive debt financing from related parties. These regulations are particularly relevant for multinational groups with complex intra-group financing structures.
3. Increased Scrutiny of Offshore Structures
Ukrainian tax authorities have intensified their oversight of transactions involving offshore entities. This includes audits to verify the proper declaration of foreign income and tax compliance related to undisclosed foreign accounts. Companies with offshore structures are advised to undergo a thorough tax audit and ensure full compliance with Ukrainian legislation. Failure to do so may trigger tax audits, penalties, and reputational risks.
4. Reporting Requirements and Financial Documentation
Entities falling under the CFC rules are required to prepare and file detailed financial reports, undergo audits, and maintain comprehensive transfer pricing documentation. Non-compliance with these reporting obligations can result in financial penalties, restrictions on profit distribution, and potential litigation with tax authorities.
Conclusion
Foreign investors operating in Ukraine should proactively manage their tax risks by closely monitoring legislative changes and ensuring full compliance with both local and international standards. Engaging qualified legal and tax advisors is a critical step in mitigating risks and maintaining a successful and transparent business presence in Ukraine.
For detailed advice, please contact our experts at Fedoryshyn & Partners
