Controlled foreign companies

Controlled foreign companies (CFCs) in the modern Ukrainian tax system are one of the key instruments for counteracting aggressive tax planning and base erosion, while at the same time creating significant challenges for business in terms of compliance, structural transparency and risk management. Their introduction in Ukraine has become a logical continuation of the implementation of OECD approaches and global transparency standards, however, the practice of applying CFC rules shows that owners of international groups have to substantially change both their structuring models and their approaches to documenting control.
Essence and purpose of CFC regulation
Controlled foreign companies are foreign legal entities or arrangements without legal personality over which a Ukrainian tax resident (individual or legal entity) exercises formal or de facto control, and whose profits may be taxed in Ukraine as income of the controlling person. The key idea is that income which traditionally remained in low-tax jurisdictions and was not taxed in the beneficiary’s state of residence is now included in their tax base, reducing opportunities for profit shifting and the use of offshore structures purely for tax purposes.
For Ukraine, the introduction of CFC rules is part of a broader strategy to counter BEPS (Base Erosion and Profit Shifting), strengthen automatic exchange of tax information and integrate into the global system of control over cross-border financial flows. At the same time, the legislator seeks to strike a balance between the need to ensure fiscal stability and the importance of not blocking legitimate international business structuring and investment activity, especially in the context of wartime and post-war economic recovery.
Formal and factual control: key features
Ukrainian legislation uses two approaches to defining control – formal legal control and factual control – in line with international practice in countries that have long applied CFC rules. Formal control is usually linked to holding a certain share in the capital or voting rights of a foreign company, as well as the ability directly to appoint or dismiss its management bodies.
Factual control is much broader and is based on the real influence of a person over the activities of a foreign company, even in the absence of a legally documented shareholding. Typical indicators of factual control include: giving binding instructions to management bodies, conducting negotiations on significant transactions followed by their formal approval, holding a power of attorney for more than one year without needing to agree each transaction, and the ability to execute transactions over the company’s bank accounts or block such transactions.
Where these actions are formally performed by third parties but they act in the interests of the Ukrainian resident and follow that resident’s instructions, it is considered that this resident exercises factual control over the CFC. In practice, this means that the formal “distance” between the beneficial owner and the foreign company no longer protects the structure from being recognised as controlled, and businesses must reconsider the role of nominee directors, trusted persons and service providers.
Exemptions, carve-outs and the impact of OECD standards
According to the OECD Report on CFC rules, exemptions and threshold requirements can be used to narrow the scope of application and focus on structures with a high risk of base erosion. International practice highlights three core approaches: setting a minimum income level below which CFC rules do not apply; limiting application to cases where a tax avoidance motive is proven; and granting exemptions where the CFC jurisdiction provides a sufficient level of taxation and has agreements on avoidance of double taxation or information exchange.
The Ukrainian legislator has partially implemented these approaches by setting criteria for exemption from taxation of CFC profits, subject to simultaneous fulfilment of several conditions regarding the effective tax rate, the nature of the company’s activities and the quality of the jurisdiction where it is registered. This approach allows lawmakers not to burden with additional tax obligations those structures where there is no real risk of profit shifting or such risk is minor, while preserving tools to target classic offshore schemes with low or zero taxation.
Obligations, reporting and sanctions
The introduction of CFC rules is accompanied by the establishment of a set of tax obligations and reporting duties for controlling persons, among which the obligation to notify the tax authorities of existing CFCs and to file a report with detailed information about their activities is particularly important. Violations of these requirements – failure to notify, late reporting or incomplete reporting – entail substantial fines that can reach hundreds of thousands of hryvnias and significantly affect the economic feasibility of maintaining complex foreign structures.
Submitting CFC reports does not in itself guarantee exemption from taxation, since reporting and taxation are separate obligations with different scope and timelines. Moreover, filing a report may trigger a tax audit of both the controlling person and the foreign company itself, especially where management is effectively exercised from the territory of Ukraine. This increases the importance of preventive tax audits and systematic monitoring of group structures, as businesses that were not CFCs in 2022 may acquire this status in 2025–2026 due to changes in ownership, control mechanisms or the nature of operations.
Challenges of the digital economy and compliance-based approach
The development of the digital economy, crypto-assets, platform-based business models and remote management significantly complicates the identification of beneficial owners and real decision-making centres in structures with controlled foreign companies. Under conditions of digital interaction and cloud-based management systems, it becomes even more difficult to trace who actually controls the foreign company, while easy access to registration and administration services in foreign jurisdictions increases the risk of abusive schemes.
In such circumstances, the traditional approach of “legal minimalism” – where key decisions are taken informally without appropriate documentation – becomes highly risky. Controlling persons are advised to shift to a compliance-oriented governance model: clearly identifying all potential CFCs in the group, documenting factual powers, ensuring a transparent decision-making chain, analysing threshold values for application of CFC rules and regularly reviewing the group structure in light of changes in international and domestic standards.

If you have any questions or issues related to control over foreign companies, CFC-related tax obligations or the building of transparent international structures, you should seek professional advice to assess risks in a timely manner and select the optimal course of action.
Author: Ihor Yasko, Managing Partner of JSC “Law Firm WINNER”, PhD in Law.