CFC Rules Through the Eyes of a Beneficiary: Taxes, Risks, Responsibility

For many years, beneficiaries — both in Ukraine and abroad — actively used corporate structures as a reliable tool to separate personal assets and income from business-related risks, including tax risks. Thanks to the principle of the “corporate veil,” a company acted as an independent legal entity and taxpayer, while the individual beneficiary formally bore no personal liability for the company’s tax obligations.

However, the global shift toward tax transparency, the implementation of the BEPS Action Plan, and the introduction of Controlled Foreign Company (CFC) rules have effectively dismantled the classic concept of the corporate veil.

Tax authorities have always relied on the substance over form principle, but with the introduction of CFC rules, explicit legislative provisions now allow tax obligations and liabilities related to CFCs to arise directly at the level of the beneficiary.

“You Scratch My Back, I’ll Scratch Yours,” or How the World Finally Said Goodbye to Confidentiality

Tax risks for beneficiaries have increased significantly due to the introduction of automatic exchange of financial information (CRS) and enhanced international cooperation between tax authorities. Through these mechanisms, Ukrainian tax authorities now systematically receive data on the ultimate beneficial owners of companies registered both in Ukraine and abroad.

Under CRS rules, financial institutions (banks, insurance companies, etc.), under certain conditions, collect and report information on their clients’ accounts to tax authorities. Ultimately, this information (identification data of individuals or legal entities, account numbers, and account balances) is transmitted to the tax authorities of the country of tax residence of the account holder and controlling persons.

Regardless of the jurisdiction where a company is registered, if its bank account is opened in a CRS-participating country, the information may be transmitted to the tax authorities of the beneficiary’s country of tax residence.

At the same time, the world is moving toward broader and more public implementation of beneficial ownership registers as a tool to combat money laundering, tax evasion, and concealment of real company controllers. More than 100 countries already maintain such registers (open or partially open), while around 30 others are in the process of implementation.

In Ukraine, failure to submit or timely update information on the ultimate beneficial owner and ownership structure of a legal entity results in administrative fines ranging from UAH 17,000 to UAH 51,000. However, fines are only the beginning.

Financial institutions and counterparties can see public registry flags indicating outdated or inaccurate beneficial ownership data. As a result, such companies are often automatically treated as high-risk counterparties, which may lead to refusal of services, account opening or maintenance, contract termination, or enhanced due diligence.

Consequently, information about accounts, income, and ownership structures that previously remained outside the scope of Ukrainian tax authorities can now be obtained without any direct involvement of the beneficiary or the company itself. Creating artificial foreign structures solely for tax optimization or concealment of real beneficial owners is no longer a secret for tax authorities.

One of the most sensitive instruments imposing tax burdens directly on beneficiaries is the CFC regime, which has been in force in Ukraine since 2022.

If no exemption applies, the adjusted profit of a CFC is taxable in Ukraine at the level of the beneficiary, regardless of whether any actual cash distributions were made. Such profit is subject to personal income tax at rates of 5%, 9%, or 18% (depending on circumstances) and a 5% military levy. Equally important are the risks related to disclosure and reporting obligations. Failure to submit CFC notifications, late reporting, errors in financial data, or lack of supporting documentation create grounds for additional tax assessments and penalties.

Violations of CFC reporting obligations may result in fines ranging from UAH 302,000 to UAH 2.1 million.

Ukrainian legislation currently allows exemption from penalties for violations committed during martial law, provided that all CFC obligations are fulfilled no later than 60 days after the end of martial law. Considering the extended statute of limitations for CFC-related tax audits — up to seven years — these risks are long-term in nature and may materialize several years after the relevant reporting periods.

As the corporate veil no longer guarantees tax security, business tax planning now requires a comprehensive approach: proper ownership structuring, genuine economic substance, timely fulfillment of reporting obligations, and readiness to defend one’s position in disputes with tax authorities.