Why check the reliability of a counterparty and how to do it

Verifying a counterparty before legalizing cooperation with him is required not only for your own peace of mind regarding his reliability, but also to convince the tax authorities of exercising due diligence before concluding business transactions. It is recommended not only to check the documentation once, but also to periodically request current versions of all documents that make sense to check. In the article we will tell you about the documents for checking the counterparty when concluding an agreement, we will provide a complete list with a description.

What documents should be requested from the counterparty before cooperation?

It is better to indicate that your company should require certain documents before concluding contracts in the Regulations on the company’s contractual work. In this case, it will be easier to justify to a potential partner on what basis you require to present certain papers. The list of documents that should be checked depends on which company you will be working with:

with a Russian legal entity,
with an individual entrepreneur,
with a foreign legal entity.

In any case, the documents must be current at the time of presentation, in the current edition. You can check this through the information in the extract from the Unified State Register of Legal Entities (in the case of legal entities) or the Unified State Register of Individual Entrepreneurs (in the case of individual entrepreneurs). The document is needed in the full version - the first and last pages or an extract will not work.

How the counterparty verification system developed

Since 2010, a huge number of cases related to interaction with counterparties have gradually appeared in the courts. These cases addressed the issue of whether companies could deduct input VAT from a supplier and deduct expenses for income tax purposes.

VAT deductions and income tax deductions were two different topics. But from time to time they overlapped when the courts considered disputes about the legality of accepting expenses for income tax purposes.

During the same period, the topic of combating fly-by-night companies and illegal VAT deductions and VAT refunds gained momentum. Judicial practice accumulated. The problem was one thing: it was unclear to taxpayers what actions they could take to prove their good faith in choosing a business partner. The answer to this question first appeared in the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation dated October 12, 2006 No. 53.

This document has attempted to describe the rules and desired behavior of the taxpayer and the tax authorities. It was then that the concept of an unjustified tax benefit was formed and another terminology appeared, which courts use to this day when considering controversial situations with claimed deductions.

Even before 2010, the approach to selecting taxpayers for conducting on-site tax audits was changed. The Federal Tax Service and the Ministry of Finance issued the first letters in which they tried to answer the question of what measures a taxpayer needs to take in order to convince the tax authorities of exercising due diligence when choosing a counterparty.

After 2010, the situation became even clearer. In addition to letters and clarifications from departments, an automated system for monitoring VAT refunds has appeared - ASK VAT-2. By this point, it had already become clear that the tax authorities had decided to approach the issue quite systematically, which means that the business response should also be systematic.

In 2021, Art. 54.1 of the Tax Code of the Russian Federation, which requires the taxpayer not to abuse the right. That is, the transaction must be real, it must be carried out by the counterparty declared according to the documents, and the parties must not have the intention of not paying or underpaying taxes.

List of documents requested from individual entrepreneurs

The list of documents confirming the legal status of an individual entrepreneur differs from the set of documents available to legally functioning legal entities: (click to expand)

Individual entrepreneurs do not have constituent documents as such - there is neither a Charter nor a constituent agreement.
The work of an individual entrepreneur is considered legal after receiving a state certificate. registration of entrepreneurs (USRIP).
The individual entrepreneur must provide an extract from the Unified Register of Entrepreneurs (USRIP), not from the Unified State Register of Legal Entities.

An entrepreneur can enter into an agreement and sign it on the basis that he has a Unified State Register of Entrepreneurs (USRIP) certificate and a Russian passport.

Answer for the bank about the reasons for choosing a counterparty

The response to a bank requesting information within the framework of the requirements of Law No. 115-FZ will also be similar in content. In addition to justifying the choice of a specific counterparty, it may also be necessary to justify the conditions for concluding a specific transaction.

Since banks face quite serious liability for failure to take measures to combat money laundering, they can rely on any (not just those listed as mandatory) signs that make a transaction suspicious (Methodological recommendations attached to the letter of the Bank of Russia dated July 13, 2005 No. 99-T). For this reason, a request from the bank may be received in relation to any transaction with any of the counterparties and require the most complete documentary justification.

You should not ignore a credit institution’s request for documents. This may become a reason for the bank not to carry out the transaction that has raised doubts (Clause 11, Article 7 of Law No. 115-FZ).

List of documents requested from a legal entity

Before you legally start working with legal entities registered in Russia, you need to check the following documents:

Legal or statutory.
Registration.
From the tax authorities.
Evidence of the authority of the person who will sign the agreement.
Extract from the Unified State Register of Legal Entities.
Work license (if the type of activity requires it).
Sample signature of the head of the company.

It is best to ask for notarized copies of documents or signed by an official of the company. A printing application is preferred. The fact that you accepted the papers can be confirmed by an inventory or act.

Constituent. This includes the Charter and/or the constituent agreement, presented in the full version and in the latest edition (you can check this fact using an extract from the Unified State Register of Legal Entities). If there are any doubts regarding the authenticity of the documents presented, you can additionally request old editions.
Extract from the Unified State Register of Legal Entities. Request an extract that was issued no later than the date of its transfer by the counterparty or the day that will be indicated in your uniform rules for checking papers. Under no circumstances agree to accept a statement made a month earlier.

You can double-check the information on the official website of the tax service. If the data differs from the information provided by the counterparty, you need to keep in mind that the Federal Tax Service portal is updated once a week.

For additional verification, you should look at the data on companies in the Unified Federal Register of information on the facts of the activities of legal entities. In this case, you should pay attention to the text of paragraph 22 of the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 25, it provides explanations of how to work with this resource.

Certificate of state registration

Be sure to check the OGRN certificate, each page of the Unified State Register of Legal Entities, as well as certificates of amendments to the Unified State Register of Legal Entities and the text of the constituent documents. Make sure that the name of the company in the constituent documents is the same as in the OGRN certificate. They do not coincide only under one condition - if the legal entity changed its name. But then this fact will be reflected in the Unified State Register of Legal Entities.

Look how many companies the director manages

If the same person is a founder in different companies, this is normal. He may simply receive a share of the profits, but not actually participate in management. But if one person runs three to five companies, and even with opposite areas of activity, this is suspicious. Companies with fake managers have this sign.

Look on the Federal Tax Service website to see if the manager is listed in other companies. Select the attribute “Manager” and indicate the last name, first name and patronymic. If you see a whole list of companies, double-check the company just in case. If the service doesn't find anything, everything is fine.

These are the main points that you definitely need to watch. Nadezhda Kolesnikova , Deputy General Director for Legal Affairs of ICT JSC, speaks about this

“Currently, there are a number of services, including free ones, that allow you to check a potential counterparty. To begin with, you should look at the website of the Federal Tax Service for a current extract from the Unified State Register of Legal Entities in relation to the counterparty, and also use the Transparent Business electronic service, which contains comprehensive information about taxpayers. In particular, you can obtain information about whether the counterparty’s address is a mass registration address, or about the multiple participation of an individual (participant, manager) in organizations, etc. This open data allows you to assess the risks of concluding a transaction. Also, when checking a counterparty, you should go to the website of the Arbitration Court of the Russian Federation - check whether it is bankrupt, and in general, obtain information about the presence of lawsuits in which a potential partner is a party. It’s also worth checking it on the website of the Federal Bailiff Service for the presence of debts and enforcement proceedings for their collection. This is the minimum of actions to check the counterparty, which indicates due diligence in selecting a business partner.”

Elena Gerasimova , General Director, also recommends that you be sure to study the company’s documents:

“To check counterparties, we recommend first collecting all available information about the counterparty online. We use special services such as Spark and Counter Focus. In addition, on the website of the Federal Tax Service of Russia you can check whether bankruptcy, reorganization or liquidation procedures have been initiated for the company, whether there are tax arrears and whether the legal address is listed as one of hundreds of fly-by-night companies. In addition, you can order an online extract from the Unified State Register of Legal Entities with an electronic signature, visit the FSSP website and make sure that no enforcement proceedings are being carried out against the person of interest. On the Arbitration Case Files website, you can view the court cases of a potential counterparty. In addition, a potential partner is usually asked to provide the required minimum of documents, such as a state registration certificate and a tax registration certificate, constituent documents, as well as confirmation of the authority of the person signing the agreement, taking into account the period and possible restrictions on the amounts or types of transactions.”

You can also arrange an additional check of the counterparty - for example, check the authenticity of licenses and see if the company is in the register of unscrupulous suppliers. And also look in another register to see what type of business the counterparty belongs to. If he has a micro-business, and he says the opposite, this should raise red flags.

Evgenia Popova , head of the Accounting Group, recommends other verification methods - obtaining an extract from the Unified State Register of Real Estate and viewing vacancy histories:

“How to check the counterparty? — We request documents from the counterparty: charter, certificate of establishment, certificate of registration, protocols and orders on the executive body and the person responsible for signing the documents. — On the website of the Federal Tax Service we receive an extract from the Unified State Register of Legal Entities and other information based on accounting and tax reporting. — We check the company with the bank - most now provide information on counterparties. The opportunity is implemented in the client bank. — We study information about the counterparty in the Yandex and Google news feeds. — We use special information resources (“Kontur.Focus”, “SPARK” and other sources). — We look at the history of the company and its vacancies through a resume search in hh.ru. — We study reviews of employees and consumers on the Internet. — We analyze information about the debts of the managers and owners of the counterparty in the “Data Bank of the FSSP of the Russian Federation.” — We do a general search on the Internet using the search query language and the archive.org portal in relation to non-working websites of debtor organizations. — If you are concluding a lease agreement, do not consider it difficult to obtain an extract from the Unified State Register of Real Estate and check the ownership and encumbrances. Some services are completely free, while others cost absolutely nothing. There is much more to lose in debt collection litigation and other lawsuits.”

List of documents requested from a foreign company

Obviously, when collaborating with a foreign company, you need to be more careful than when concluding an agreement with a Russian company. Some features need to be taken into account:

Without exception, all documents proving the legal status of a foreign enterprise must have an official translation into Russian. Also, for companies from all countries with which Russia has not concluded an international agreement on a simplified procedure for cooperation, it is required to legalize documents (have a separate document, sometimes an apostille). This applies to the Charter, certificate of incorporation, and articles of association. An apostille is required for those states that are not parties to the Hague Convention. The power of attorney of the employee signing the contract is subject to certification in a similar manner.
Additionally, you need to request an extract from the trade register of the state where the company is registered (such a register is not maintained in all countries - if this is your case, ask for a certificate proving the successful functioning of the company). The current status of the enterprise in the statement should be “active”.

Reasons for checking counterparties for integrity

When deciding to cooperate with a new counterparty, quite often the management of an organization asks questions about the reliability of the counterparty (whether the counterparty will complete the work after payment) and the risks associated with possible questions from the tax authorities.

You can proceed from the general principle of good faith and not conduct checks when concluding an agreement with a new partner. But it’s smarter and safer to act prudently and take care of the success of your business.

Tax legislation obliges the parties to the concluded agreement to verify the integrity of the counterparty under the agreement. For example, organizations have entered into an agreement for the provision of office cleaning services. The Contractor sent the customer a service acceptance certificate and an invoice. Based on the results of a desk audit, the tax authority may refuse to deduct VAT for the following reasons:

the contractor has no employees on staff (which means no one could physically carry out the cleaning);

the executor is not at the legal address, does not pay taxes, does not submit tax reports (hence, the executor is dishonest);

the documents from the contractor were signed by an unauthorized person (not the manager, therefore they are invalid).

Therefore, it will not be possible to obtain a VAT deduction on them.

It is also better to carry out such an audit because tax inspectors also pay close attention to this when conducting tax audits, who carefully check all the organization’s counterparties for signs of “fly-by-night companies.” The main argument is that the organization must select clients with due diligence .

The courts believe that an organization must choose such counterparties, communication with which will not entail additional tax charges for it. If inspectors declare the use of a tax minimization scheme, then in general the courts check the following circumstances:

whether the taxpayer exercised due diligence when choosing a counterparty;
whether the counterparty has expenses for conducting business activities;
whether payments passing through this company are of a transit nature;
whether the funds were received by the real producer of goods (works, services) or returned to the one from whom they were sent;
whether the price for the goods purchased by the taxpayer corresponds to the average prices prevailing on the market;
whether the transactions are feasible from an economic point of view.

A taxpayer is considered to be in good faith until proven otherwise.

Legislative acts on the topic

It is recommended to study the documents in advance:

Document	Name
Art. 174 Civil Code of the Russian Federation	On declaring a transaction invalid if the powers of the director of the second party were in any way limited at the time of signing the agreement
clause 1 art. 186 Civil Code of the Russian Federation	On recognizing the power of attorney of authorized persons as invalid if it does not contain the date of its execution
Art. 1, Art. 12 of the Federal Law of May 4, 2011 No. 99-FZ “On licensing of certain types of activities”	List of activities subject to licensing

Typical design mistakes

Mistake #1. A Russian company began to cooperate with a foreign company without thoroughly checking information about its activities.

If due diligence is not exercised, the tax inspectorate will accuse the company of trying to reduce the tax base, which will lead to a comprehensive audit of the company and additional taxes.

Mistake #2. A domestic company entered into an agreement with an enterprise whose status in the trade register of the country of registration was listed as “discontinued”.

If you start cooperation with an organization that has ceased its activities, it will be impossible if it fails to fulfill its obligations to defend its interests in court.

When and why is a counterparty verification needed?

You need to check your counterparty in a wide variety of situations, for example, if:

a transaction with him is carried out for the first time. When checking, you can detect suspicious aspects even before concluding a contract and protect yourself from possible problems in the future;
the potential counterparty has recently registered. The new company does not pose any particular danger as a counterparty, but working with it can be fraught with a lot of different threats and risks;
There are a lot of negative reviews about the counterparty. In some situations, negative information about a company may be spread by competitors or disgruntled employees. However, in most cases, it characterizes cooperation with the counterparty as unreliable and problematic;
the counterparty works only on prepayment. In this case, the company may find itself paying the money under the contract, but not delivering the goods or performing the work.

Checking the counterparty reveals that the company does not fulfill its obligations under the contract, has problems with government agencies, is engaged in fraud or cash-out transactions, is at the stage of liquidation or bankruptcy, has debts on taxes and fees, is involved in legal proceedings, etc. The results obtained from assessing the activities of the counterparty will help protect the company from problems with the tax inspectorate, as well as loss of time and finances.

Answers to common questions

Question No. 1. What should you pay attention to if an agreement with a legal entity is signed by its authorized representative, not its manager?

First of all, check whether this person has been issued a power of attorney to perform these actions. If the document is available, look at the date on which it was executed - if the date is missing, the power of attorney is invalid. Also pay attention to its expiration date. The document is certified by a notary or the management of the company that issued it. The text of the power of attorney must clearly state that the employee has the right to enter into contracts on behalf of the company.

Question No. 2. If all the documents were verified, but the business owner did not know or could not know about some significant points, due to which a dispute subsequently arose, will the court be on his side?

No. In this case, the businessman will be considered to have failed to exercise due diligence, since he could have hired a lawyer or consulted elsewhere.

Activities carried out to verify the counterparty

To verify the integrity of a potential business partner, it is recommended to carry out the following set of measures:

request documents directly from the counterparty;
conduct a check of the future partner using public databases and electronic services;
check the location of the legal entity, as well as its retail, production and other premises at the stated address;
make personal contacts with the management of the enterprise or its representatives acting by proxy;
take part in the direct signing of the contract (this point cannot always be fulfilled due to the distance of the partner, however, when the amount of the contract is significant, it is better to spend money on a trip to another region than to receive negative consequences).

Below we will consider the first 2 events in more detail.