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.
Practice experience: 19 years
Specialization: litigation support, tax, customs and antitrust practices, agricultural law, IT and M&A
Practice experience: 21 years Specialization: support of economic, civil, labor and administrative disputes, energy
Practice experience: 11 years Specialization: tax, customs and corporate disputes, support of inspections, contractual activities
Practice experience: 6 years
Specialisation: business and civil law, tax and customs practice, corporate law, registration and reorganisation of business
Practice experience: 11 years Specialization: support of economic, civil, labor and administrative disputes, inspections
Before entering into a contract, it is essential to verify your counterparty using electronic databases of the State Fiscal Service of Ukraine, the Unified State Register of Legal Entities and Individual Entrepreneurs, the Unified State Register of Court Decisions, and other open sources available on the Internet. Doing so will reduce the risk of the tax authorities classifying business operations as fictitious or non-existent. Additionally, it is important to gather information on any criminal proceedings regarding the company’s fictitiousness, false information provided during registration, tax evasion, or disputes related to the failure to fulfill contractual obligations.
When drafting a contract, it is essential to clearly define its subject matter to specify the service you are providing and how, or the product you are selling or manufacturing. Additionally, it is necessary to have primary documents that confirm the execution of the business transaction, especially if the signing of such documents is stipulated in the contract.
It is important to remember that primary documents confirming the execution of a business transaction must include mandatory details: the initials, position, and signature of the person responsible for the transaction, as well as the company seal (if mentioned in the company’s charter). Otherwise, such a document will not serve as proof that the goods/services were actually received by the buyer/client.
If the contractor commits a breach for which a penalty is specified in the contract, and such a breach causes damages to the client, the penalty amount is credited toward the compensation for damages. Therefore, we recommend explicitly stating in the contract that all penalties and fines are not credited toward the damages subject to compensation.
You can check tax risks in contracts and dealings with counterparties by ordering the relevant service from the law firm WinnerLex. Our tax attorneys have extensive practical experience in protecting businesses in their interactions with tax authorities. We will promptly conduct a detailed analysis of both draft and existing contracts, as well as primary documentation, to identify elements in their content or in the operational schemes between counterparties that may raise concerns with tax authorities.
Timely checking of tax risks in contracts and dealings with counterparties helps to avoid various negative consequences that may arise if violations are detected by tax authorities, potentially leading to sanctions.
Tax risk checks can be conducted during the contract drafting phase, when choosing a tax scheme for a new company or project, or prior to a tax audit.
You can contact the offices of WinnerLex, located in Kyiv and Dnipro, or reach out to us via the phone numbers listed on our website under the “Contacts” section and at the bottom of every webpage.
