CONTROLLED FOREIGN COMPANY AS A TAX PAYER: SOME DISCUSSION ASPECTS OF THE DEFINITION OF THE CONCEPT

Author
, Doctor of Legal Sciences, Professor, head of the Department of Financial Law, Ukraine, Kharkiv
, Graduate student at the Department of Financial Law, Ukraine, Kharkiv

In heading

 Law;

Signed print

 22.12.2023

Issues number

 2023-№4 (55)

Page

 36-55

Type of articles

 Scientific article

Code UDK

 347.73:336.717(477)

ISSN print

 2411-5584

Abstract

 Problem setting. Starting from January 1, 2021, the amendment to the Tax Code of Ukraine Article 39-2 entitled “Controlled foreign companies” (hereafter – CFC) came into force. Its introduction is conditioned by the adoption of the Law of Ukraine “On Amendments to the Tax Code of Ukraine on Improving Tax Administration, Eliminating Technical and Logical Inconsistencies in Tax Legislation” No. 466-IX dated January 16, 2020.
The theoretical understanding and the issue of the practical application of these legislative novels are very relevant, because in the conditions of the general globalization of economic processes in general and the European integration of Ukraine in particular the issue of cross-border taxation will increasingly gain weight, and the share of budget revenues from such taxes will gradually increase.
Recent research and publication analysis. Problems of the characterization of controlled foreign companies as taxpayers have been studied by numerous scientists, such as N. A. Atamanchuk, А. O. Monaienko, M. O. Bondarenko, D. O. Kobylnik, A. M. Kotenko, S. V. Broiakov, M. O. Mishyn, A. V. Savinova, K. S. Tverezovska, O. V. Zhukova, H. M. Kalach, I. S. Korin, I. M. Faketa and others.
Paper objective. The purpose of the article is to reveal the essence of CFC, and to develop proposals for improving tax legislation in the context of the formation of the institution of CFC income taxation.
Paper main body. A controlled foreign company is any legal entity registered in a foreign country or territory that is recognized as being under the control of an individual – a resident of Ukraine or a legal entity – a resident of Ukraine under the rules defined by the Tax Code of Ukraine. The concept of “legal entity”, which can be acknowledged as a controlled foreign company, includes and/or equates to: companies
that have the status of a legal entity under the legislation of its registration; foreign formation without having legal entity status.
The legislator’s approach used to determine the range of entities without the legal entity status is not sufficiently verified, because this list includes not only entities without the legal entity status, but also entities that have the status of a legal entity in the relevant foreign jurisdiction.
The concept of a controlling person, the recognition or non-recognition of that directly affects the recognition or non-recognition of such a person as a taxpayer is a separate important issue. In this aspect, there are certain questions regarding the practical implementation of legislative requirements.
As a general rule, the financial statements of a CFC are prepared in accordance with the accounting standards applied by the controlled foreign company. Therefore, in certain situations, in order to adjust the profit of CFC, the controlling person will have to organize a duplicate accounting system. At the same time, the rules for calculating the adjusted profit of CFC essentially require the creation of a separate system of tax accounting for CFC within the framework of Ukrainian legislation.
The issues of securing tax benefits, and in particular exemption from taxation of the income of CFCs, which is a necessary and logical addition to the existing mechanisms for avoiding double taxation. However, it raises doubts about such a basis for the exemption of the income of the CFC from taxation, as the exemption of public companies whose shares (stakes) are traded on a recognized stock exchange. Why does this rule not apply to other public companies whose shares are traded on other (unrecognized) stock exchanges and to private companies whose annual financial statements are audited and which publish these statements and auditor’s reports? Accordingly, it turns out that only those who control a large company will be exempt from taxation on this basis, and owners of medium and small businesses will be deprived of such an opportunity by definition. This approach is not justified.
Conclusion of the research. The legal institution of income taxation of the CFC is currently a novel of the Ukrainian tax legislation. The text of the law was developed on the basis of the guidelines of the Organisation for Economic Co-operation and Development (OECD) as part of the implementation of the action plan of the Road Map plan of measures to combat Base erosion and Profit Shifting (BEPS) into national legislation. Ukraine is only accumulating experience in the field of income taxation of CFCs. Therefore, it is natural that there are comments and questions regarding the text of the Tax Code of Ukraine. In addition, as of now, neither its law enforcement nor judicial practice has been formed.
Currently, the draft Law of Ukraine on amendments to Article 39-2 of the Tax Code of Ukraine is at the stage of expert discussion. Most likely, the expert community will take into account the obvious shortcomings of the text of the article in the current edition and they will be eliminated.
Short abstract for an article
Abstract. Based on the disclosure of the essence and characteristics of controlled foreign companies (CFCs), topical issues of taxation of their profits and activities of controlling persons as taxpayers are revealed. The need to improve the legal regulation on the responsibilities of a controlling person to ensure the preparation of financial statements by a CFC, the distribution of responsibility for non-submission of financial statements, the determination and consolidation of tax benefits, and in particular the exemption of CFC from income taxation is substantiated.

Keywords

 taxation, international taxation, transfer pricing, tax planning, aggressive tax planning, BEPS, tax benefits, personal income tax, income tax, tax residency, tax avoidance, legal status.

Reviewer

External reviewer

Article in PDF

 36-55

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Code DOI

 https://doi.org/10.31359/2411-5584-2023-55-4-36

22.12.2023