Features of CFC reports for English companies

More than six months ago, the first CFC reporting campaign ended. However, issues related to reporting from controlled foreign companies do not lose their relevance. This is due both to the imperfection of regulatory regulation in the specified area and to the significant fines provided for in Art. 120.7 of the Tax Code of Ukraine.

At the same time, since there is currently a moratorium on bringing taxpayers to financial responsibility for non-submission, late submission and submission of an incorrectly prepared CFC Report, we suggest that you consider the specifics of filling out and submitting the CFC report using the example of companies registered in Great Britain, because according to published by the State Tax Service of Ukraine of statistics on the submission of CFC reports for 2022-2023, of the total number of CFC reports submitted by controlling persons, 13% (which is the second place after Poland in terms of the prevalence of CFC registration jurisdictions) belongs to English companies.

What are the peculiarities of English companies’ CFC reporting?

Organisational and legal form of English companies

It is worth noting that compared to other jurisdictions in which, as a rule, only one organisational and legal form of legal entity registration prevails among non-residents: LTD for Cyprus, SRL for Romania, UAB for Lithuania, etc. (i.e. analogues of the Ukrainian LLC), in Great Britain both ordinary LTD and LLP/LP (partnerships) are registered equally often. We discussed the peculiarities of partnerships in Great Britain separately in the article “Registration of partnerships (LLP/LP): which countries are still relevant?”.This not only affects the functioning of the company in the UK but also the submission of CFC reporting in Ukraine because partnerships have their own characteristics.

First of all, it should be noted that in the case of a partnership registered in the UK, the controlling person is obliged to submit a Report on CFC. The partnership is an entity without the status of a legal entity but has the status of a controlled foreign company (ITC dated 10.03.2023 No. 3336/ITC/99-00-24-03-02-06).

In accordance with the legislation of Great Britain, LP, as a type of partnership in the UK, is exempt from the obligation to submit annual reports. This, on the one hand, facilitates the process of conducting business through such an entity for the owners of such partnerships and, on the other hand, places an additional burden on the CFC controllers regarding the preparation and submission of financial statements in Ukraine.

Pursuant to clause 39-2.3.1 of the Tax Code of Ukraine, in the event that according to the legislation of the foreign jurisdiction of the tax residence of the controlled foreign company, there is no obligation to prepare financial statements, the controlling person must ensure the preparation of financial statements of the controlled foreign company in accordance with international financial reporting standards. Therefore, despite the fact that according to the law of Great Britain, LP has the right absolutely legally not to prepare financial statements, Ukrainian law requires it.

At the same time, we note that such financial statements are also subject to a number of requirements:

1. First, it must be compiled in accordance with IFRS. This requires, in particular, the display of comparative information on the assets and balance sheet of the CFC for previous periods, the availability of a Financial Statement (balance sheet), a Statement of Total Income, and a Statement of Cash Flows.
2. Secondly, such financial statements must be duly certified. In view of a number of available explanations of the STS of Ukraine, “duly certified copies of the financial statements of a controlled foreign company” are considered to be their certification in accordance with DSTU 4163:2020. According to p. 5.26 of the National Standard “Requirements for the preparation of documents” (DSTU 4163:2020) provides that a note on the certification of a copy of a document consists of the words “according to the original”, the title of the position, the personal signature of the person who certifies the copy, his/her first and last name, date certification of a copy. That is, the company’s controllers need to print out the financial statements and put a handwritten signature along with the certifying inscription “According to the original, the title of the position…” on each page of the financial statements.

Financial year for English companies

In accordance with clause 5 of the Order of the Ministry of Finance dated 25.08.2022 No. 254, for the purposes of tax control over the taxation of the profit of a controlled foreign company, the reporting (tax) period is the calendar year or another reporting period that ends within the calendar year. Yes, in the case when the fiscal year of the CFC coincides with the calendar year (for example, in Cyprus), taxpayers do not have any questions about this.

However, for English companies, the financial year is determined in a special order – from the date of company registration and ends on the last day of the following year of the month in which the company is registered.

For example, the English LTD was registered on 10.04.2021. In this case, according to UK law, its first financial year will be the period from 10.04.2021 to 30.04.2022. The second and subsequent periods after the first financial year, for which the company must prepare statutory financial statements in the UK (Annual Reports), is the period from 01.05.2022 to 30.04.2023.

In this case, the question arises: for what period was it necessary to report to the taxpayer regarding his own English company? After all, according to the general rule, by 01.05.2024, it was necessary to report for two years:

• 2022: for the financial year of CFC from 01.01.2022 to 31.12.2022; and
• 2023: for the financial year of CFC from 01.01.2023 to 31.12.2023.

It should be noted that there are a number of tax legislation conflicts regarding this issue. Thus, according to Clause 54 of the Transitional Provisions of the Tax Code of Ukraine, the first reporting (tax) year for the report on controlled foreign companies is 2022 (if the reporting year does not correspond to the calendar year – the reporting period starting in 2022). The specified normative provision is special relative to the general one and applies only to reporting for 2022. Guided by the specified legal norm, it can be concluded that the English CFC is obliged to report for 2022 by submitting a Full Report on CFC for the period from 01.05.2022 to 30.04.2023.

Tax experts followed a similar approach in a number of individual tax consultations. In particular, according to the ITC of October 9, 2023, No. 3482/IPK/99-00-24-03-03-06, the tax office noted that for a CFC registered under the laws of Great Britain, the first reporting (tax) period is the period from 01.11.2022 to 31.10.2023, starting in 2022.

If the reporting period begins on 01.11.2022 and ends on 31.10.2023, the controlling person is obliged to submit a full report together with the annual declaration of assets and income and a duly certified copy of the financial statements of the CFC, confirming the amount of its profit for the reporting (tax) period 2022 to May 1, 2024.

Regarding the submission of the CFC report for the 2023 reporting year in 2025 under similar circumstances, such a report must be submitted in accordance with paragraph 392.5.2 clause 392.5. Section I of Art. 392 of the Tax Code simultaneously with the submission of the annual declaration on property status and income by means of electronic communication in electronic form in compliance with the requirements of the law on electronic document circulation and a qualified electronic signature.

However, in the case of reporting according to the principle indicated above, a problem arises: what to do with the general rule applied after 2022 for subsequent reporting years, namely that “the reporting year for CFC is the reporting period ending within the calendar year”?

That is, according to the logic of the legislator, the English company must first be guided by the special rule for submitting the CFC report for 2022 and submit it for the period from 01.05.2022 to 30.04.2023, and then for the report for 2023 – submit it for a similar period, because 30.04.2024 is the period ending during the reporting year 2023.

During the reporting campaign, taxpayers had a well-founded dilemma: how to file a CFC report for an English company? It was especially relevant for those CFCs whose fiscal year began on 01.12.2022 and ended on 31.11.2023. For these companies, in fact, it was necessary to report for 2022, submitting reports for only 1 month (December).

Since there are currently no evaluation results for submitted reports on CFC, it is difficult to analyse the correctness of filling out CFC reports for English companies. At the same time, as you can see, the problem with submitting the CFC report is more than urgent due to the presence of gaps and conflicts in the tax legislation. In this regard, since there is currently a moratorium on bringing taxpayers to financial responsibility, and there is also the possibility of submitting clarifying reports on CFC provided by the legislation of Ukraine, we advise you to contact specialists who provide professional services on these issues. The lawyers of Bcorp will help you take into account the above-mentioned features of the CFC reporting for the English CFC and will provide the services of compiling CFC Reports taking into account the norms of tax legislation.