Recent legislative changes in Ukraine exempt individuals from personal income (“PI”) tax on income received from liquidation of foreign companies, and may be the catalyst forcing many Ukrainian business people to re-evaluate the future of their Controlled Foreign Companies (“CFCs”). Coupled with the recently introduced Register of beneficial owners in Cyprus, not to mention the increasingly stringent Cypriot banking compliance requirements, liquidation may just be the most appealing route to take advantage of new tax incentives and provide the best possible exit route for CFCs.
Tax Free Liquidations
The Law on Amendments to the Tax Code of Ukraine Purposed to Improve the Administration of Taxes, Eliminate Technical and Logical Inconsistencies in the Tax Legislation (the “Law”) which came into force in Ukraine on 23 May 2020 introduced new rules for CFCs primarily aimed at preventing the shifting of profit from Ukraine to offshore low-tax jurisdictions.
The CFC Rules, applicable from 1 January 2022, introduce taxation of income received from CFCs by Ukrainian ‘controlling’ persons with an ownership interest in a foreign entity of (1) over 50% or (2) over 10% (25% in 2022-2023) provided Ukrainian nationals jointly own at least 50% or (3) in case of established de facto control over a foreign entity.
Although the Law does provide for some tax exemptions, profits earned by a CFC will need to be included in the aggregate taxable income of a Ukrainian resident and be subject to 18% personal income tax plus 1.5% military tax for individuals and 18% corporate tax for legal entities.
For those reconsidering the future of their CFCs, provided certain conditions are met, liquidation of these companies may present the best option, resulting in an exemption of 18% PI tax. To benefit from these rules, the liquidation of a CFC must have commenced after 1 January 2020 and be completed by 31 December 2021.Also, Ukrainians who own or control a CFC will be required to file a tax return in 2022 thereby disclosing assets received through the liquidation, submit documentation confirming the value of the CFC and apply for tax exemption from Ukrainian tax authorities.
For those ready to declare their CFC’s assets, liquidating their CFC now (there may still be sufficient time to dissolve the company and meet the 31 December 2021 deadline if liquidation commences imminently) could mean significant tax savings. Other routes are also available; a CFC may move the place of its effective management to Ukraine and recognise itself as a tax resident of Ukraine, nevertheless stricter tax administration rules may still mean the tax-free liquidation path is the favoured route.
Cyprus UBO register
Another factor which for owners of CFC’s to consider is the requirement for detailed information of UBO’s of Cypriot companies to be registered in a centralised system (subject to some exceptions e.g. listed companies) by 12 March 2022. Although entities registered from 16 March 2021, have 30 days from their registration to file the required information.
This information will need to be confirmed annually and failure to comply will result in penalties. The Registrar of Companies will maintain the UBO Register which will, initially be accessible by the competent supervisory authorities (the police, tax authorities, CySEC etc) and will eventually be made available to the public at large at a fee of €3.50.
Liquidation routes
When considering liquidation of Cyprus and other common law jurisdiction companies the key question will be: Which type of liquidation process is most appropriate?
Is it Members’ Voluntary Liquidation (“MVL”), a solvent liquidation process through which all liabilities must be settled, including liabilities which may arise as a result of unreasonable assessments issued by the Director of Revenue and Taxes in Cyprus or, alternatively Creditors’ Voluntary Liquidation (“CVL”), an insolvent liquidation process meaning creditors will only be paid to the extent that the company itself owns assets available to settle them, the balance will remain unpaid and the company is dissolved. The latter route is often not fully explored or utilised in appropriate circumstances, leading to possible adverse consequences and the UBOs ultimately paying the price.
CRI Group is Cyprus’ leading firm on corporate restructuring and insolvency with undisputed credentials, specialising not only in MVLs and CVLs spanning across all common law jurisdictions, but also complex cross border insolvencies and asset tracing. Our expertise means we can fully explore all restructuring and liquidation options whilst working closely with local tax advisors to maximise possible benefits for the client.
Our directors Chris Iacovides and Andri Antoniou, known in Ukraine amongst many local professionals from their tenure as joint Liquidators of Mriya Agro Holding PLC, were recognised in respect of their efforts and the successful restructuring of Mriya by the former Governor of the Central Bank of Ukraine, Valeria Gontareva who commented: “We very much welcome what Mriya has been able to do. I think that this is a really huge breakthrough. I can say that this is the first story of its kind on our territory, so the national bank very much welcomes Mriya’s restructuring”.
CRI Group
20 Nikis Avenue Office: 400 1086,
Nicosia CYPRUS
Tel: +357 22 455545
[email protected]
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