The question of “substance” (a set of criteria for confirming the presence of a company in a jurisdiction and reality of a business) is becoming more and more relevant. Now, the need for substance is especially acute if there are foreign companies in the corporate structure of a business.
Many IT companies use the following corporate structure: a parent company is opened in Estonia; a subsidiary is established in a third country outside the EU; the subsidiary uses the services of employees or individual entrepreneurs. This structure made it possible to reduce the tax burden on businesses.
However, such a structure is now in jeopardy. For example, in Ukraine, CFC rules (taxation of income of controlled foreign companies) threaten that the profits of the parent company in Estonia will in any case be taxed in Ukraine, regardless of the distribution of dividends.
Of course, the legislation provides for some tax exemptions. One of the requirements for obtaining such an exemption is the confirmation of the reality of the business, that is, the “substance”. And now, the tax authorities are beginning to put forward more serious requirements for the substance.
If the substance is incorrectly formalized, the foreign parent company will be recognized as fictitious with the application of the consequences of tax evasion. This entails criminal liability, as well as a special type of liability for non-compliance with the CFC rules.
For example, in Ukraine, depending on the amount of unpaid taxes, one may face a fine of up to 10m hryvnias (319k euros) with confiscation of property. In addition, a criminal conviction will damage the business reputation, which will affect the ability to do business in Europe.
Our company has experience in providing substance in accordance with the requirements of the tax authorities. We would be happy to help.