Author: admin2

Starting from 1 January 2022, an individual resident of Ukraine or a legal entity resident of Ukraine is obliged to notify the supervisory authority of

– each direct or indirect acquisition of a share in a foreign legal entity or the beginning of the exercise of actual control over a foreign legal entity, which leads to the recognition of such an individual (legal entity) as a controlling person in accordance with the requirements of this article;

– foundation, creation or acquisition of property rights to a share in assets, income or profit of an entity without the status of a legal entity;

– each alienation of a share in a foreign legal entity or termination of actual control over a foreign legal entity, which leads to the loss of recognition of such individual (legal entity) as a controlling person in accordance with the requirements of this Article;

– liquidation or alienation of property rights to a share in the assets, income or profit of an entity without legal entity status.

What information should be provided and what is the form of the Notification?

By its Order No. 512 dated 22.09.2021, the Ministry of Finance approved the form of the Notification on the acquisition (commencement of actual control) or alienation of a share (termination of actual control) by a resident in a foreign legal entity or property rights to a share in the assets, income or profits of an entity without legal entity status.

The notification must be provided:

– Data on the resident (controlling person) sending the Notification;

– Data on a foreign legal entity or entity without legal entity status

– Information on the acquisition / alienation of a share in a foreign legal entity

– Information on the beginning / termination of the actual control over the foreign legal entity

Deadline for sending notification on acquisition or termination of participation in CFC

The notification is sent to the supervisory authority within 60 days from the date of such acquisition (commencement of actual control) or alienation (termination of actual control).

Is it necessary to submit a notification on control over CFC acquired before 2022?

The Law of Ukraine dated January 16, 2020 No. 466 IX “On Amendments to the Tax Code of Ukraine on Improving Tax Administration, Elimination of Technical and Logical Inconsistencies in Tax Legislation” entered into force on January 01, 2022. Therefore, a resident of Ukraine who acquired or alienated a share in a CFC before 01.01.2022 does not submit a CFC notification. If the acquisition or alienation occurred after this date, the person is obliged to submit a notification.

Penalties sanctions

Failure by a controlling person to notify the controlling body of the acquisition of a share in a foreign legal entity, formation without the status of a legal entity, or the beginning of the exercise of actual control over a foreign legal entity, or the alienation of a share in a foreign legal entity, or the termination of the exercise of actual control over a foreign legal entity in time, entails the imposition of a fine in the amount of 300 times the subsistence minimum for an able-bodied person established by law as of January 1 of the tax (reporting) year for each such fact.

On January 01, 2022, Law No. 466-IX of January 16, 2020, which amended the Tax Code of Ukraine and introduced the institution of a controlled foreign company, came into force. Also, Article 392 was supplemented to introduce the concept of a controlled foreign company (CFC).
A controlled foreign company is any legal entity registered in a foreign state or territory, which is recognized as being under the control of an individual or legal entity

• resident of Ukraine.
  Controlling person is an individual or legal entity (residents of Ukraine) that is a direct or indirect owner (controller) of a CFC, which
• owns a share in a foreign legal entity in the amount of more than 50 percent, or
• owns a share in a foreign legal entity in the amount of more than 10 percent, provided that several individuals – residents of Ukraine and/or legal entities – residents of Ukraine own shares in a foreign legal entity, the amount of which in aggregate is 50 percent or more, or
• individually or together with other residents of Ukraine – related persons exercises actual control over a foreign legal entity.

A share in a foreign legal entity may be corporate rights, rights in an entity without the status of a legal entity, the assets of which include a share in a legal entity, or any other similar rights and/or powers that give a natural or legal person the right

• influence the corresponding share of votes in the supreme management body of the foreign legal entity
• to receive the corresponding part of the profits of a foreign legal entity,
• blocking the decision on the distribution of part of the profits of a foreign legal entity,
• to receive the corresponding part of the assets of a foreign legal entity in case of its liquidation or termination.

At the same time, a person is considered to own a share in another legal entity in the following cases

• possession on the basis of ownership, or
• if the ownership of the relevant share is legally owned by other persons acting in the interests of such person (trust declaration, nominee service agreement).

A person is considered to exercise actual control over a legal entity if such a person has the ability to exercise significant or decisive influence on the decisions of such a legal entity regarding the conclusion of transactions, disposal of assets and profits, termination of activities, regardless of the legal registration of such influence, in particular, but not exclusively, at least one of the following circumstances

• providing binding instructions to the management bodies of a legal entity;
• conducting negotiations by a person on the conclusion of transactions by a legal entity and agreeing on the essential terms of such transactions, which are subsequently only formally approved by the management bodies of a legal entity or executed by the management bodies of a legal entity without further additional approval;
• the person has a power of attorney to make significant transactions on behalf of the legal entity, issued for a period of more than one year, and does not provide for prior approval of such transactions by the management bodies of the legal entity;
• the person performs transactions on bank accounts of the legal entity or has the ability to block transactions on such accounts;
• indication of a person as a founder (beneficiary, actual beneficiary) of a legal entity when opening accounts by such legal entity.

Residents of Ukraine who own a share in a CFC through direct or indirect ownership in another legal entity – a resident of Ukraine, provided that the latter is recognized as a controlling person in accordance with this paragraph and is obliged to tax the adjusted profit of a controlled foreign company, are not controlling persons.
Starting from January 1, 2022, an individual resident of Ukraine or a legal entity resident of Ukraine is obliged to

notify the controlling authority of each direct or indirect acquisition or termination of a CFC share;

submit a CFC Report to residents who are direct or indirect owners (controllers) of CFCs.

In case you have any additional questions regarding
– preparation of the Notice on acquisition or termination of participation in CFC;
– preparation of the Report on CFC;
– calculation of adjusted profit of CFC and taxation of such profit,
our colleagues are ready to advise you.

In this section we will analyze what functional analysis is, what are the functions and why it is necessary

What does functional analysis mean?

In accordance with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Function, Assets and Risk (‘FAR’) Analysis is defined as an analysis of the functions performed (taking into account the assets involved and the risks assumed) by associated (related) enterprises in controlled transactions and by independent enterprises in comparable uncontrolled transactions. In accordance with subpara. 39.2.2.2 of Article 39 of the Tax Code of Ukraine (hereinafter – the “TCU”), “when determining the comparability of transactions, the following elements of controlled and comparable transactions are analyzed: functions performed by the parties to the transaction, assets used by them, conditions of distribution of risks and benefits between the parties to the transaction, distribution of responsibilities between the parties to the transaction and other conditions of the transaction (hereinafter – functional analysis)”.

What are the functions?

The list of functions that need to be investigated is given in subparagraphs 39.3.1.2-39.3.1.4 of Article 39 of the TCU.
The analysis of the functions used by the parties to the transaction in the performance of their duties, in particular, but not exclusively, includes: design and technological development of goods; production of goods; assembly of goods or their components; installation and/or installation of equipment; research and development; acquisition of inventory; wholesale or retail sales; advertising of goods (works, services); storage of goods; transportation of goods; provision of consultations, information services, etc.
Also, when analyzing a transaction, it is necessary to take into account the risks of the parties to the transaction related to the conduct of business activities that affect the terms of the transaction, in particular, but not exclusively, the following: changes in market prices, changes in the official exchange rate, loss of property, credit conditions, etc.
When conducting the research, it is also important to analyze the parties of assets, such as equipment, intangible assets, securities and financial instruments that are important in terms of the implementation of specific transactions. The lists of functions, risks and assets provided in the TCU, OECD guidelines or the UN Guidelines are not exhaustive and may be supplemented taking into account the provisions of contracts, peculiarities of the business transaction and its parties.

Для чого потрібен функціональний аналіз?

Метою цього аналізу є визначення ролі кожного учасника операції.

In accordance with subparagraph 39.3.2.7 of Article 39 of the Tax Code of Ukraine, the party to be investigated is the party

• for which the application of such method (combination of methods) is the most reasonable
• for which the most comparable transactions and/or comparable persons can be found
• for which there is the most complete and documented information on the financial indicators of the controlled transaction, which are used to calculate profitability indicators

also which:

• assumes the least complex functions in relation to the controlled transaction;
• assumes the least economic (commercial) risks in relation to the controlled transaction;
• does not own intangible assets that have a significant impact on profitability.

The result of the functional analysis is the determination of a simpler, “lighter” party, that is, a party with a lower functional, risk load and with fewer assets used in the controlled transaction. The choice of the party under study makes it possible to focus on assessing the applicability of the methods to each relevant transaction and analyzing the factors that affect it – the availability of information on prices for comparable goods or services in open sources, specialized publications, commercial databases, the availability of internal comparable transactions, etc.
Thus, the purpose of functional analysis is to find and systematize the data of the parties in the controlled transaction. Prices applied in any transaction should reflect the characteristics and take into account the risks assumed and assets used. Qualitative functional analysis is the key to the correct identification of the party of the study and one of the prerequisites for choosing the most appropriate transfer pricing method. In addition, such analysis will help to strengthen the position of the taxpayer in possible disputes with the tax authorities.

Author – Taras Mishchenko / senior tax consultant

It should be reminded that in 2021, the changes in the field of transfer pricing voted by the Verkhovna Rada of Ukraine according to the Law No. 466-IX (№1210) came into force – according to which Ukrainian companies will prepare Global Transfer Pricing documentation (master file).

For whom is the preparation of the master file and global TP documentation relevant?

According to subpara. 39.4.7 of Article 39 of the Tax Code, the global documentation is prepared by the taxpayer if two requirements are met simultaneously

• it is a member of an international group of companies;
• the total consolidated income of the international group of companies for the financial year is equal to or exceeds the equivalent of EUR 50 million.

Transactions that the Ukrainian company carries out with non-residents of the state that provide preferential tax regimes to business entities, or in which the peculiarities of calculating the tax base actually allow business entities not to pay corporate income tax, then this is not a basis for preparing Global TP documentation.

What are the requirements for the preparation of the master file?

Global transfer pricing documentation (master file) is a set of documents or a single document drawn up in any form, which should contain information on

a) the system and structure of the organization of the international group of companies and the country in which the participants can carry out their direct activities;

b) information on the activities of the international group of companies, including

description of the key factors that make up the financial result

main sources of supply (goods/services) and determination of the amount of the largest income;

analysis of contracts, participants of the international group;

functional analysis of relationships between participants of the international group of relations;

description of agreements on business restructuring, acquisition and disposal of assets.

c) intangible assets used by international group companies in their activities;

d) description of financial activities of the international group companies;

e) consolidated financial statements of the international group company for the last financial year;

f) information on unilateral agreements that took place in transactions between members of the international group of companies.

What are the deadlines for the preparation of global TP documentation?

According to subpara. 39.4.9 of Art. 39 of the TCU, the territorial body of the State Tax Service has the right to send a request to provide global transfer pricing documentation to the taxpayer. The master file must be provided by the taxpayer within 90 calendar days from the date of receipt of the request.

It should be noted that the STS request can be sent in a year, but not later than three years from the end of the fiscal year. That is, for 2021, a request from the STS can be sent from 2023 to 2025 inclusive.

What are the penalties for not preparing?

If the payer does not provide the necessary documents, he will be fined in the amount of 300 subsistence minimum. This is specified in paragraph 120.3 of Article 120 of the Tax Code of Ukraine. In turn, according to paragraph 120.6 of Article 120 of the Tax Code of Ukraine, untimely submission of global documentation entails a fine in the amount of 3 minimum incomes for one late calendar day. However, the amount of this fine may not exceed 300 minimum living wages.

author – Taras Mishchenko / senior tax consultant