After Ukraine introduced controlled foreign company (CFC) rules, thousands of business owners with companies abroad acquired new tax obligations.

Many Ukrainians own companies in Estonia, Poland, the United Kingdom, the UAE, Cyprus, and other countries, but do not always understand when they are required to notify the Ukrainian tax authorities about such a company and file a CFC Report.

Misunderstanding the CFC rules is one of the most common causes of penalties, requests from the State Tax Service, and issues during tax audits.

Let us look at who qualifies as a controlling person, when CFC notifications and reports must be filed, what exemptions exist, and how to avoid common mistakes.

What Is a Controlled Foreign Company (CFC)?

A controlled foreign company (CFC) is a foreign legal entity or a foreign arrangement without legal-entity status that is controlled by a Ukrainian tax resident.

Simply put, if a Ukrainian resident controls a foreign business or has significant influence over its activities, that structure may be treated as a CFC for Ukrainian tax purposes.

Who Is Considered a Controlling Person?

Under clause 39-2.1.1 of the Tax Code of Ukraine (TCU), a controlling person may be an individual or legal entity that is a resident of Ukraine.

Most commonly, controlling-person status arises when a person:

• directly or indirectly owns more than 50% of a company;
• owns more than 10% if several Ukrainian residents collectively own more than 50%;
• exercises de facto control over the company’s activities regardless of the formal size of their ownership interest.

It is the controlling person who is responsible for fulfilling all obligations related to the CFC.

When Must the Tax Authorities Be Notified About a CFC?

Many owners of foreign businesses mistakenly believe that a notification only needs to be filed once.

In fact, the obligation to notify the State Tax Service arises in several cases:

• acquisition of an interest in a foreign company;
• incorporation of a new foreign company;
• acquisition of control over a company;
• disposal of an ownership interest;
• loss of control;
• liquidation of a foreign company.

Under clause 39-2.2.1 of the TCU, the notification must be filed within 60 calendar days from the date of the relevant event. Missing this deadline is one of the most common violations of the CFC rules.

When Is a CFC Report Filed?

In addition to the notification, the controlling person is required to file a CFC Report.

The report is filed together with the annual personal income and property tax return.

The report includes:

• information about the foreign company;
• ownership structure;
• financial indicators;
• the amount of the CFC’s profit;
• grounds for applying exemptions or exceptions;
• information about taxes paid abroad.

The foreign company’s financial statements are usually used to prepare the report.

Is Tax Payable on CFC Profits?

Not always.

The Tax Code of Ukraine provides for a number of cases in which the adjusted profit of a CFC is not included in the taxable income of the controlling person.

In particular, exemptions may apply depending on:

• the jurisdiction in which the company is registered;
• the existence of an international treaty with Ukraine;
• the amount of the CFC’s income;
• taxes actually paid abroad;
• other criteria provided for by Article 39² of the TCU.

Therefore, even if the company pays taxes abroad, CFC reporting still requires a separate analysis.

What Documents Are Needed to Prepare a CFC Report?

It is advisable to start preparing the documents in advance.

Depending on the company’s country of registration, the following may be required:

• constitutional documents;
• an up-to-date extract from the register;
• documents relating to the ownership structure;
• financial statements;
• documents confirming payment of taxes;
• bank statements;
• documents relating to dividend payments;
• information about subsidiaries and other structures.

In practice, obtaining documents from abroad often takes the most time.

What Penalties Apply for Violations of the CFC Rules?

The Tax Code of Ukraine provides for significant financial penalties for:

• failure to file a CFC notification;
• failure to file a CFC Report;
• late filing of reports;
• submission of incomplete information;
• failure to provide supporting documents.

The amount of the penalty depends on the specific type of violation and can be substantial.

This is why compliance with CFC requirements should be monitored before the reporting deadlines arise.

Do Penalties Apply During Martial Law? (link to detailed article)

This is one of the most common questions among owners of foreign businesses.

Due to amendments introduced by Law No. 3706-IX and subsequent legislative changes, penalties for most violations of the CFC rules committed during martial law are temporarily not applied.

However, this does not mean that CFC obligations have been cancelled.

Controlling persons must fulfil their obligations after martial law ends within the time limits established by law.

Therefore, CFC matters should not be postponed indefinitely.

Common Mistakes Made by Owners of Foreign Companies

In practice, the following mistakes are most common:

• failure to file a CFC notification;
• incorrect determination of controlling-person status;
• lack of financial statements;
• late preparation of documents;
• incorrect application of tax exemptions;
• ignoring the rules on de facto control;
• the belief that an inactive company is not subject to the CFC rules.

Most of these mistakes can be corrected before filing by conducting a preliminary analysis of the ownership structure.

Practical Example

A Ukrainian citizen owns 100% of a company in Estonia or Poland that provides services to clients in Europe and pays taxes in its country of registration.

Despite this, the owner must analyse:

• whether controlling-person status arises;
• whether a CFC notification must be filed;
• whether a CFC Report must be filed;
• whether tax exemptions may apply.

The mere fact that taxes are paid abroad does not automatically exempt the owner from complying with Ukrainian law.

Conclusion

The CFC rules have already become an integral part of Ukrainian tax law for owners of foreign businesses.

If you own a company abroad or exercise de facto control over a foreign structure, it is important to assess your notification and reporting obligations in a timely manner.

Timely preparation of documents, correct determination of controlling-person status, and professional analysis of the ownership structure help avoid penalties, unnecessary risks, and disputes with the tax authorities.

Estonia has remained one of the most popular jurisdictions for international business for many years. Transparent corporate legislation, advanced digital infrastructure, and the ability to administer companies remotely make it attractive both to startups and to entrepreneurs operating in international markets.

At the same time, many foreign entrepreneurs mistakenly believe that they must first obtain e-Residency in order to establish a company in Estonia. In fact, this is only one of the available mechanisms for registering a business.

In practice, Estonian law allows a company to be incorporated either through e-Residency or through an authorised representative acting under a notarised power of attorney. Each option has its own features, advantages, and limitations.

In this article, we will examine how these mechanisms differ and which option may be more appropriate depending on your business goals.

Is e-Residency Mandatory for Opening a Company in Estonia?

No. Obtaining e-Residency is not a mandatory condition for establishing an Estonian company. Although the e-Residency programme is often associated specifically with business formation, it is only a digital identification tool that simplifies interaction with Estonia’s electronic services.

In practice, an entrepreneur can choose one of two main approaches:

• first obtain e-Residency and independently carry out most corporate actions electronically;
• register the company through a representative under a power of attorney without obtaining e-Residency in advance.

The choice between these options depends less on the complexity of the procedure than on the future business management model.

Company Registration Through e-Residency

The e-Residency programme gives foreigners access to Estonia’s digital infrastructure and allows them to use a qualified electronic signature when working with government and corporate services.

After receiving an e-Residency card, an entrepreneur can participate in the company registration process, sign documents, and perform a range of administrative actions remotely.

This is why the mechanism is popular among owners of IT companies, SaaS projects, consulting businesses, and other entrepreneurs whose activities do not require a permanent physical presence in a particular country.

Advantages of e-Residency

The main advantage of e-Residency is the ability to manage the company independently and remotely.

After receiving the digital ID card, the owner or a management board member can use an electronic signature to interact with public registers, sign corporate documents, and complete many administrative procedures online.

In addition, e-Residency can significantly reduce the number of documents that require notarisation or physical delivery between countries.

For entrepreneurs planning to use an Estonian company on a long-term basis, this often becomes an important advantage.

Disadvantages of e-Residency

Obtaining e-Residency requires additional time and a separate application procedure.

The applicant must submit an application, pass the required checks, and collect the e-Residency kit in person at one of the official pickup locations.

In addition, the decision to grant e-Residency is made by Estonian public authorities, so submitting an application does not guarantee a positive outcome.

For entrepreneurs who want to start the company formation process as quickly as possible, the need to obtain e-Residency in advance may extend the project timeline.

Company Registration Through a Representative Under a Power of Attorney

An alternative option is to establish the company through an authorised representative acting under a notarised power of attorney.

In this case, the founder authorises a lawyer or another person to carry out the necessary company registration actions on their behalf.

This mechanism is used quite often, especially when a business owner does not want to wait for e-Residency or is unsure whether they will actively use Estonia’s digital infrastructure in the future.

Advantages of Registration Through a Power of Attorney

The main advantage of this approach is the ability to start the company formation process without obtaining e-Residency first.

The founder does not need to go through a separate procedure for obtaining a digital ID card, which in some cases allows the project to move forward faster.

This option can also be convenient for investors or business owners who do not plan to handle the company’s day-to-day administration themselves.

In addition, registration through a representative is often used in more complex corporate structures where several participants or legal entities are involved in the process.

Disadvantages of Registration Through a Power of Attorney

The main disadvantage is that, at the company formation stage, the owner is to some extent dependent on the representative and on the proper preparation of documents.

In addition, the absence of e-Residency means that some corporate procedures in the future may require additional document formalities or the involvement of a representative.

This is why this option is not always optimal for entrepreneurs who plan to actively manage the business themselves.

Can Both Methods Be Combined?

Yes, and this approach is quite often used in practice.

Registering a company through a representative and obtaining e-Residency are not mutually exclusive mechanisms. On the contrary, they can complement each other effectively.

For example, an entrepreneur may first register the company through a representative under a power of attorney and then obtain e-Residency for subsequent remote management of the business.

This approach combines the speed of company formation with the advantages of digital administration in the future.

This is why e-Residency should not be viewed solely as a company formation tool. In many cases, its main value lies precisely in managing an already existing business afterwards.

Which Option Should an Entrepreneur Choose?

There is no universal answer to this question.

If an entrepreneur plans to manage the company independently, use an electronic signature regularly, and actively interact with Estonia’s digital services, obtaining e-Residency is usually a justified choice.

If the priority is a quick business launch or the owner does not plan to be directly involved in the company’s day-to-day administration, using a notarised power of attorney and engaging a representative may be more practical.

When choosing a mechanism, it is important to consider not only the technical registration procedure but also subsequent tax, corporate, and compliance matters.

In practice, the greatest risks for an international business owner arise not at the company registration stage but during its subsequent operation. That is why, before forming a company, it is advisable to assess the future business structure, taxation rules, accounting requirements, and the possible implications of controlled foreign company (CFC) rules.

Conclusions

A company in Estonia can be opened either through e-Residency or through a representative acting under a notarised power of attorney. Both mechanisms are legal and widely used by international entrepreneurs.

The choice between them depends on business goals, the project timeline, the future company management model, and readiness to use Estonia’s digital infrastructure. Therefore, before starting the procedure, it is advisable to assess not only the company registration process but also the long-term legal and tax implications of the chosen structure.