Declaration of foreign income and CFC’s profit by individuals: what to pay attention to

Given the above, in this publication, we will discuss the key aspects of declaring the adjusted profit of controlled foreign companies (“CFCs”) and foreign income that individuals – tax residents of Ukraine can receive.

Foreign income: what to consider

Foreign income is subject to personal income tax at the rate of 18 %, except, in particular, dividends from non-residents, payments in connection with the distribution of profits of a formation without the status of a legal entity (partnership, trust, fund) that is not a CFC, which are subject to personal income tax at the rate of 9 %.

The amount of annual personal income tax can be reduced by the amount of taxes paid abroad, and the reduction is determined in the Declaration. For this purpose, it is necessary to obtain a certificate from the authorised state body of the country where such income was received, confirming the amount of tax paid and the tax base/object of taxation.

CFC’s profit: peculiarities of declaring

If a person is a controlling person of a CFC, such person shall determine, according to the rules of the Tax Code, a part of the CFC adjusted profit in proportion to the share of his/her ownership or control at the end of the reporting period and declare this profit within income in the Declaration.

The Declaration must also be accompanied by a CFC report, to which copies of its financial statements shall be attached.

However, if a controlling person is unable to ensure the preparation of the CFC’s financial statements or the calculation of its adjusted profit by 1 May, a report on the CFC in a shortened form must be submitted. In this case, the full report must be submitted by 31 December.

The profit of a CFC is subject to personal income tax at the rate of 18 %, except for certain cases when it can be subject to personal income tax at the rate of 9 % (for example, if a controlling person distributes the CFC profit before submitting the CFC report and reflects this profit in the Declaration).

At the same time, the amount of personal income tax payable on the CFC’s profit can be reduced by the amount of corporate tax/other similar tax paid by the CFC according to the laws of a foreign state (including taxes that were withheld at the source of payment from the amount of income received by the CFC). Copies of the documents confirming the fact of such payment shall be submitted together with the Declaration.

Military duty: what rate applies

The foreign income and CFC adjusted profit based on the results of 2024 are subject to military duty at the rate of 1.5%. 

The 5% rate applies to income accrued (paid) to taxpayers starting from 1 January 2025.

A person is not a tax resident of Ukraine: whether he/she is obliged to declare the above income

Only tax residents of Ukraine are required to declare the above income. If a person defines himself/herself as a tax resident of another country, then in Ukraine, he/she will have tax obligations only in respect of income received from a source of origin from Ukraine. 

It should be noted that the issue of tax residency is particularly relevant, as millions of Ukrainians have been forced to leave Ukraine and could have acquired the status of tax residents of other countries. At the same time, tax residency is often difficult to determine, given that it is influenced by a large number of criteria and factors. In case of doubt, a comprehensive analysis of the individual’s specific situation and life circumstances is required.

Failure to declare the above income: what consequences are possible

If a person fails to disclose in the Declaration information on foreign income or CFC profit, this may have certain consequences, in particular:

• receiving requests from the tax authority to provide information on such income/explanations regarding the CFC;
• conducting a documentary unscheduled audit in this regard;
• accruing of personal income tax, military duty, fines, and penalties by the tax authority.

However, no fines are imposed for CFC-related violations committed during martial law which include, in particular, failure to submit/late submission of a CFC report, failure to reflect certain information on CFCs in such a report.

The exemption from fines is valid if the relevant obligations are fulfilled within 6 months after the termination of martial law. 

The issue of income declaration is also important given that Ukraine is subject to the requirements of the Common Standard on Reporting and Due Diligence for Financial Account Information (CRS), under which the State Tax Service of Ukraine automatically exchanges financial information of taxpayers with certain countries. For example, if a foreign account of a Ukrainian resident is identified as reportable by a relevant foreign bank or other financial institution, the Ukrainian tax authority will receive information on such account.

We talked about this in more detail here. 

The information obtained may be used for tax purposes, in particular, for the potential determination of tax liabilities. However, information relating to the financial accounts of a Ukrainian citizen cannot be used for these purposes if their aggregate balance does not exceed the equivalent of USD 250 thousand as of 31 December of the calendar year that falls within the period of martial law in Ukraine. 

The issue of income declaration by individuals may require a comprehensive analysis of related factors, inter alia, determination of the tax residency status, the procedure for taxation of foreign income, the scope of responsibilities of the CFC’s controlling person related to reporting, as well as the further algorithm of actions in this regard. 

Legal advice will help you avoid mistakes in this process. If you have any questions, please do not hesitate to contact GOLAW’s specialists, and we will provide you with qualified legal assistance.