Identifying tax risks

Identifying tax risks in contracts and interactions with counterparties is an essential element of preventive measures to legally protect a company's operations.

Tax risks during contract execution and dealings with counterparties primarily involve the risk of tax authorities raising claims against a company due to identified violations of tax legislation in business transactions and/or their documentation. In our practice, we often encounter situations where contractual work and the documentation of business transactions within a company are managed by managers or, at best, accountants who naturally lack comprehensive knowledge of the practical application of tax legislation.

In such cases, tax risks during contract execution may arise simply because the company uses contract templates found online or signs contracts provided by counterparties without proper analysis and consideration of the specific circumstances and risks of the particular transactions and business operations. The same applies to the preparation of primary documentation for business transactions.

These and other factors collectively lead to errors made by the company in contract management and primary documentation, which are subsequently identified by tax authorities during inspections and classified as violations of tax legislation. As a result, the company may face additional tax liabilities and penalties, requiring the need to challenge such assessments through administrative or judicial proceedings to avoid significant financial losses.

To avoid such issues, tax risk assessments in contracts and dealings with both new and ongoing business partners should be conducted on a regular basis.

Tax risk identification in contracts and interactions with counterparties can be performed during the preparation phase of each agreement, as well as during its implementation and the preparation of primary documentation.

Additionally, a tax risk review of contracts and counterparty dealings can be carried out based on a comprehensive audit of the company’s existing agreements, in the form of a legal audit. The tax risk assessment is conducted by tax attorneys from the WinnerLex Law Firm, who possess extensive practical experience, including expertise in tax dispute resolution. This allows for an evaluation of tax risks in contract execution from the perspective of how tax legislation is practically applied by tax authorities and even courts during tax disputes. Thus, the tax risk assessment aims to forecast the likelihood of negative “interest” from the tax authorities regarding a specific business transaction in advance, as well as the prospects for defending the client’s interests should any claims be brought by the tax authority.

Tax risk assessment in contracts and operations includes, in particular, the evaluation of:

• the tax burden of a specific transaction;
• tax risks considering the characteristics of a specific industry;
• the proper tax due diligence of a counterparty;
• tax risks associated with working with sole proprietors (FOPs);
• risks of reclassification of civil-law contracts as employment contracts;
• risks related to permanent establishments of foreign companies;
• tax risks in the execution of commercial contracts;
• risks of violations of tax legislation by taxpayers;
• risks associated with business liquidation, and more.