Tax Risk Minimization

Tax risks are potential financial losses and reputational consequences faced by business due to tax service claims, tax assessments, fines and possible criminal prosecution. In modern conditions, when tax legislation constantly changes and the State Tax Service uses automated control systems, professional tax risk minimization is not a luxury but a necessity for business survival and development.

What Are Tax Risks and Why Do They Arise

Tax risks are the probability of negative consequences arising in the form of tax assessments, fines, penalties or criminal prosecution due to taxpayer activity non-compliance with Tax Code of Ukraine requirements.

Main causes of tax risks include complexity and instability of tax legislation – laws constantly change, and their interpretation by tax authorities and courts may differ. Aggressive tax optimization – using schemes that are formally legal but raise tax authority suspicions. Accounting and reporting errors – technical errors that tax authorities may interpret as intentional evasion. Work with risky counterparties – cooperation with companies having fictitious signs.

Types of tax risks: financial – tax, fine and penalty assessments of millions of hryvnias, operational – tax invoice blocking, account blocking, activity stoppage, reputational – inclusion in risky taxpayers list, counterparty trust loss, criminal – case initiation under Articles 212, 222, 190, 191 of Criminal Code of Ukraine.

Tax Planning and Optimization System

Tax planning is lawful activity aimed at minimizing tax burden by using opportunities provided by legislation.

Choosing optimal taxation system is the first and most important step. For individual entrepreneurs, possible options: general system (income tax rate 18% + military levy 1.5% + unified social contribution 22%), simplified system (single tax 2-5% depending on group), patent for certain activity types. For LLCs: general system (profit tax 18%), simplified system (single tax 2-6% depending on group and VAT presence).

Structuring business for tax efficiency includes distributing activity among several legal entities or individual entrepreneurs to use different taxation systems, separating individual business directions into independent companies, using holding structures for profit consolidation.

Using tax benefits and preferences: benefits for IT companies (reduced unified social contribution rate), benefits for enterprises working with disabled persons, tax holidays for startups, investment benefits, regional preferences.

Tax Risk Audit: Identifying Vulnerabilities

Regular tax risk audit helps identify problems before tax service notices them.

What tax audit includes: tax reporting analysis for errors and inconsistencies, transaction documentary confirmation verification, counterparty risk assessment, financial indicator correspondence to industry average analysis, tax benefit application correctness verification, risk assessment by State Tax Service automated system criteria.

State Tax Service risk criteria system includes low tax burden compared to industry average (less than 1% of turnover), negative VAT value during several consecutive periods, activity volume inconsistency with available resources (personnel, fixed assets), work with counterparties from risky list, profitability indicators atypical for industry.

Following audit results, a report is compiled with identified risks and recommendations for their elimination: which documents need preparation, which operations need re-execution, which counterparties need replacement, which explanations need preparation in case of audit.

Working With Counterparties: Verification and Risk Minimization

Working with risky counterparties is one of the most common tax assessment causes.

Risky counterparty signs: absence of actual location information, absence of personnel and fixed assets (according to reporting data), mass registration address or mass director, presence in VAT risky taxpayers list, tax reporting non-submission or zero reporting, short existence period (less than 6 months), unusually low prices compared to market.

Counterparty verification procedure before contract conclusion: registration data verification through USR (Unified State Register), risky taxpayers list presence verification on State Tax Service website, statutory documents copy request, actual location verification (visit, call), reputation analysis (reviews, court cases), director and founders mass verification.

Due diligence documentation: save all counterparty verification evidence (registry screenshots, correspondence, office photos), execute counterparty verification acts, save advertising materials, counterparty price lists, record negotiations and meetings, save transaction reality evidence (transport documents, goods photos, acceptance acts).

Transaction Documentary Execution

Proper documentary execution is the best protection from tax claims.

Mandatory primary document elements under current legislation: document name, compilation date, enterprise name, economic operation content and volume, measurement units, responsible persons’ positions and signatures, personal signature or other data allowing person identification.

Typical document flow errors: supply contract specification absence, discrepancies between contract, invoice and act, service acceptance-transfer act absence, mutual settlement reconciliation act absence, date inconsistency in different documents, transport document absence when selling goods.

Individual operation execution features: services – mandatory detailed work completion act indicating service content, goods – cargo-transport invoices, movement invoices, inventory acts, fixed assets – commissioning acts, write-off acts, leasing or rental contracts, export-import operations – customs declarations, transport documents, invoices, non-resident contracts.

Tax Audit Prevention

Preventive measures help either avoid audit or significantly reduce its consequences.

What to do to reduce audit probability: maintain tax burden at level not lower than industry average, timely submit all reporting without delays, avoid prolonged negative VAT value, promptly respond to tax requests for explanations, not appear in criminal proceedings as counterparty, maintain actual presence at legal address.

What to do upon receiving audit notification: immediately engage lawyer for audit support, conduct internal potential risk audit, prepare all documents, correct obvious errors (if possible), instruct employees about their rights and duties, appoint responsible person for auditor communication.

Assessment Appeal: Defense Strategy

Even with best planning, assessments are possible that need proper appeal.

Administrative appeal is the first stage. Complaint is filed to State Tax Service within 10 days from notice-decision receipt. Advantages: automatically suspends decision execution, free, gives court preparation time.

Judicial appeal is carried out in administrative court. Period is 10 days but may be restored by court. Appeal grounds: procedural violations during audit, incorrect legislation application, tax conclusion groundlessness, evidence inadmissibility, outdated or unreliable information use.

Effective appeal strategy includes detailed audit act and notice-decision analysis, procedural violation search, independent expert engagement (tax consultants, auditors), additional transaction reality evidence collection, legal position preparation referencing Supreme Court practice, claim security petition.

Judicial Practice Role in Defense

Supreme Court has formed clear positions protecting taxpayer rights: good faith principle – taxpayer not responsible for counterparty violations, taxpayer decision lawfulness presumption, economic content priority over form, burden of proof lies with tax authorities.

What Is Not Tax Minimization

Important to understand the boundary between lawful optimization and unlawful tax evasion.

Unlawful schemes creating criminal risks: fictitious counterparty use for expense inflation, working through “envelopes” without execution, primary document forgery, income concealment through unexecuted operations, business fragmentation exclusively for VAT evasion purposes.

Lawful optimization differs by having real economic purpose (not only tax reduction), using legally provided opportunities, accompanied by real operations, properly documented, withstanding business purpose verification.

Lawyer’s Role in Tax Risk Minimization

Professional legal support is the key to safe business conduct.

Lawyer on permanent basis conducts regular tax risk audit (quarterly or yearly), consults on optimal business structure, helps choose taxation system, verifies counterparties before concluding large contracts, prepares internal regulations and accounting instructions.

When risks arise, analyzes tax requests and claims, prepares substantiated responses and explanations, supports tax audits, appeals unlawful assessments, represents interests in courts.

Strategic planning includes developing long-term taxation optimization strategy, business restructuring planning, merger and acquisition support from tax perspective, international operations planning.

Why Choose Dextra Law

Dextra Law legal company specializes in tax consulting and tax risk minimization for business.

Our advantages:

• Comprehensive approach – from risk audit to audit support and court disputes
• Deep expertise – 98% of tax disputes end in clients’ favor
• Preventive work – we help prevent problems, not just solve them
• Individual solutions – we develop strategy considering your business specifics
• Knowledge relevance – we constantly track legislation and judicial practice changes

If you want to minimize tax risks, optimize taxation or face tax audit threat – contact Dextra Law. We will help protect your business from tax losses and preserve financial stability!

Frequently Asked Questions