Russian Federal Tax Service Clarifies Due Care and Diligence Criteria when Selecting Contracting Parties


Legal Update No. 596

Goltsblat BLP advises that the approach of the Federal Tax Service to dealing with unjustified tax benefits cases is developing.

In April 2017, a letter from the Russian Federal Tax Service on Identifying Circumstances of Unjustified Tax Benefit appeared in public sources. This letter, No. ED-5-9/547 dated 23 March 2017, has not yet (as at today’s date) been published but a copy is available at:

The Russian Federal Tax Service letter contains directions regarding the criteria used, in disputes with bad faith contracting parties, to establish that a tax benefit is unjustified.

The letter gives tax authorities well-defined procedural guidelines for more detailed and thorough checking of the nature of transactions and relations between contracting parties. One of the intentions of these guidelines is to prevent additional taxes being charged on contracting parties on formal grounds. There is also a wide range of criteria that, in fact, define the way the Federal Tax Service understands the concept of due care and diligence. The letter is binding for territorial tax authorities and represents a guide to actions in the course of tax audits.

We do not expect that this letter will in practice substantially alleviate dispute situations in the near future but we are still hopeful that the practice of tax offices will recognise the approaches spelled out in the letter and that there will be a fall in the number of formal claims to taxpayers' documents and actions.

The letter is a good check list for companies as to what exactly will be requested and checked by the tax authorities. By working through the criteria it is possible to reduce tax risks, including those relating to criminal prosecution.

Given that claims relating to bad faith contracting parties are, in practice, the most common ones among all tax claims and that even the most diligent taxpayers do not, as a rule, have all the documents listed in the letter, we recommend the following:

  • checking availability of documents relating to current contracting parties;
  • improving policies for selecting and verifying new contracting parties.

The Goltsblat BLP tax team will be happy to help you in carrying out these checks and in structuring procedures aimed at tax effectiveness and business efficiency.

Contact details

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