Changing offshore to CIF or how business can save on taxes after BEPS

Changing offshore to CIF or how business can save on taxes after BEPS

How to optimize taxes today and get away from offshore? Features of structuring a business in Ukraine through a corporate investment fund (CIF)

What happened and why is everyone talking about some CIFs?

On August 8, 2019, Ukraine ratified the Multireteral Convention to Implement Tax treaty Related Measures to Prevent BEPS. This is the 15th step of the BEPS Plan, developed by the Organization for Economic Cooperation and Development (OECD), which main goal is the fight against offshore. So far, the MLI provisions have not entered into force in relation to Ukraine.

But for Ukrainian business, which is used to concentrating its income and assets on offshore companies, it is important not to ignore the global trend and urgently revise its operating structures.

One way to abandon offshore denominations is to create a legal individual corporate investment fund (CIF). In other words, a company which balance sheet will contain all assets.

What is a CIF and how to create it?

Corporate Investment Fund is a legal entity, that is created in the form of a joint stock company and is the issuer of the Fund's shares. CIF can be created using the foundation method only. At the same time, the merger, division, separation, acquisition or transformation of a corporate fund are prohibited.

The constituent document of CIF is its articles of association. The minimum charter capital of the Fund is 1250 minimum monthly wages established by law on the day the fund is registered as a legal entity.

CIF cannot conduct independent activities, but only joint investment. Such a right is given to it from the moment it is registered in the Unified State Register of Collective Investment Institutions, as well as receiving a Certificate of entering information about a unit fund into the Unified State Register of Collective Investment.

The basis for entering information about a unit fund into the Unified State Register is the registration of its regulations by the National Securities and Stock Market Commission of Ukraine.

What is the essence of CIFs?

The main advantage of working through CIFs is the optimization of the tax burden on the business. A loan, royalties, property rent, real estate acquisitions are the most common tools.

For example, the Fund may buy property on the balance sheet and further lease it to an operating company. The company will pay it rental charges, increasing its gross expenditure and reducing the financial result before taxation and income tax.

The result is an accumulation of income on CIF balance. Also, the Fund’s income is not taxed in the form of royalties upon registration of intellectual property rights onto the CIF. Another advantage is that the Fund can give loans to legal entities in which its share is 10% or more.

Who can become a member of CIF?

An individual, legal entity, including a non-resident, can become a CIF member after purchasing the Fund’s securities in accordance with the legislation of Ukraine on the depository system. In this case, the founders can pay for the shares of CIF only in cash.

It is noteworthy that the owner of the entire stake in CIF can be one person. Also, legal entities, which charter capital contains the share of state or communal property over 25%, cannot be Fund members.

Despite the fact that a corporate investment fund is being created as a joint stock company, its activities are regulated by the Law of Ukraine No. 5080-VI "On Joint Investment Institutions" dated July 5, 2012.

Who manage CIF?

CIF authorities include general meeting and supervisory committee. Corporate investment fund officials are the chairman and members of the supervisory committee.

At the same time, the asset management company (AMC) manages the affairs and assets of CIF based on the relevant agreement. The AMC is created in the form of a joint stock company or a limited liability company and is managed by its authority bodies provided in articles of association, depending on the chosen organizational form. In addition, the AMC is fully controlled by the owner of the Corporate Investment Fund.

Members of the Fund may take part in the management of its activities, appoint representatives to participate in the General Meeting and recall them at any time, participate in the distribution of profits and receive dividends.

What is the advantage of CIFs?

The main advantage of joint investment institutions in Ukraine is tax preferences established by paragraph 141.6 of Art. 141 of the Tax Code of Ukraine. Mutual investments are exempt from income tax for the period of their stay in the assets of the Fund.

If more precisely, the following funds are exempted from taxation:

  • - funds contributed by the founders of the Fund;
  • - funds and other assets attracted from its members;
  • - equity income;
  • - income accrued on assets, as well as other activities income. For example, interest on loans, rental (leasing) payments, royalties.

However, in the case of transactions that are subject to VAT, the CIF is an ordinary VAT payer.

Only divested capital is taxed. The tax on the amount of distributed dividends to the Fund members - individuals - is 10.5%: 9% - the preferential income tax rate, plus 1.5% - the military levy.

Thus, you reduce the tax burden on the business in a completely legal way.

What sectors are effective to use CIFs in?

In Ukraine, corporate investment funds have gained widespread practice of use only in the construction sector. Most often, CIFs are used by companies in the construction of residential buildings and other real estate.

CIFs are also used for refinancing in a group of companies, when structuring mergers and acquisitions, and selling a business.

What can a CIF invest in?

The assets of a corporate investment fund may include:

  • - monetary resources;
  • - foreign currency (on current and deposit accounts);
  • - bank grade metals;
  • - real estate and movable property purchased for joint investment funds;
  • - corporate rights;
  • - rights of claim;
  • - intellectual property;
  • - securities;
  • - other assets stipulated by the legislation of Ukraine.

What income can CIF have?

As a result of CIF's activities, the Fund gains profit from operations with assets. This may be income from the sale of assets, rental payments, royalties, interest income or dividends.

These incomes can be reinvested in other assets or paid as dividends to participants.

I decided to close CIF, how to do it?

A CIF can be liquidated voluntarily by decision of the general meeting of the corporate fund members. Also, Law No. 5080-VI provides factors which lead to the mandatory liquidation of the Fund.

Who to contact to create a CIF?

КУА, КИФ - инструменты для структурирования бизнес-активов

InVenture has experience in managing and providing the following asset management services for customers:

  • Creation of an asset management company (AMC), including obtaining a license in the National Securities and Stock Market Commission of Ukraine
  • Creation of venture corporate investment funds (CIF)
  • Sale of ready-made venture corporate investment funds (CIF)
  • Integrated administration of the CIF, under the management of AMC
  • Consulting on taxation issues of AMC and CIS

On the issue of registration of a corporate investment fund, please contact:

Source: Liga

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