Fictitious Counterparties: How to Protect Your Company from Tax Authority Claims

Fictitious counterparties are one of the most common issues businesses face during tax audits. The tax authorities increasingly apply strict measures, considering transactions with such counterparties as risky, which may lead to VAT invoice blocking, additional tax assessments, and penalties.

Who Are Fictitious Counterparties?

Fictitious counterparties are business entities created formally, without real business operations or economic activity. They are often used for незаконного formation of tax credit, tax evasion, or money laundering schemes.

How Does the Tax Authority Identify Fictitious Counterparties?

The tax service analyzes various indicators of company activity, including:

• absence of employees, office, or equipment;
• minimal or no reporting;
• inconsistency between transaction volumes and actual business activity;
• suspicious links between companies;
• irregular banking transactions.

If suspicions arise, the tax authority may initiate an audit, block VAT invoices, or apply financial penalties.

How to Protect Your Company from Claims?

1. Carefully Verify Counterparties

Before entering into agreements, it is important to check counterparties through public registers, financial reporting analysis, tax history, and the existence of offices and employees.

2. Document All Transactions

Keep a complete package of documents, including contracts, acts of completed works, invoices, and payment confirmations. This helps prove the reality of transactions.

3. Maintain Transparent Accounting and Tax Records

Avoid questionable schemes that may attract the attention of tax authorities.

4. Cooperate with Professional Lawyers

Legal support helps prevent documentation mistakes, prepare arguments in case of claims, and respond promptly to audits.

What Should You Do If the Tax Authority Accuses You of Working with a Fictitious Counterparty?

• Gather all documents confirming the reality of transactions.
• Prepare detailed explanations and evidence of the counterparty’s activity.
• Appeal unjustified decisions before tax authorities and courts.
• Involve attorneys to represent your interests during audits and court proceedings.

Conclusion

Working with counterparties is not only about business but also about responsibility. Timely verification of partners and careful documentation will help avoid problems with the tax authorities and protect your company from unjustified claims.

The Ukrainian Bar and Real Estate Association provides qualified legal support for businesses, including:

• counterparty verification;
• legal support of transactions;
• protection during tax audits;
• appeals against tax authority decisions.

Contact us to protect your business professionally and reliably.