How to Check a Counterparty Before Signing a Contract

Checking a counterparty before you sign a contract is not needless bureaucracy — it protects your VAT credit, your deductible costs and your business reputation. If a partner turns out to be a “shell”, the tax authority can rule the transaction unreal, strip out the VAT credit and assess additional liabilities — and it will be you, not them, who has to prove good faith. Below is a step-by-step algorithm: which registers to check and how to assemble a dossier that will confirm your due diligence if the State Tax Service (DPS) comes knocking.

Why bother: the price of negligence

In my expert practice, most disputes over “unreal” (goods-less) transactions come down to one thing: the taxpayer could not show that, before the deal, they had checked their partner in any way at all. Ukrainian tax law — article 44 of the Tax Code of Ukraine — requires that the figures in tax returns be supported by primary documents reflecting the real movement of goods, works or services. On top of that, those documents must be kept for at least 1,095 days. If a supervisory body considers a transaction fictitious, it removes the VAT credit and disallows the costs; in some cases the file is referred to the Bureau of Economic Security (BEB) for assessment of possible tax evasion.

The key concept here is due diligence (in Ukrainian, nalezhna obachnist). It is a principle developed through case law: a conscientious business, before entering into a contract, takes reasonable steps to satisfy itself that the partner is genuine and has legal capacity. The law contains no exhaustive list of such steps, so diligence is proven by the body of evidence you have collected. In plain terms: the court and the tax authority assess not only the fact of the deal, but also what you knew or could have known about the counterparty at the moment you concluded it.

It is important to understand the mechanics of proof. Formally, the burden of proving that a transaction was unreal lies with the supervisory body. In practice, however, the moment the tax authority raises doubts about a counterparty’s resources, personnel or supply chain, the burden of rebuttal effectively shifts to the taxpayer: it is you who must show that the goods existed, moved and were paid for. That is why evidence of diligence gathered in advance is not paperwork — it is your line of defence in a dispute.

Basic registers: the first level of checking

This is the minimum, taking 15–20 minutes, that closes off the crudest risks. All the sources listed are official and mostly free. The easiest way to search is by the EDRPOU code (the entity’s registration code; for a sole proprietor, or FOP, use their taxpayer registration number). It is unique and rules out confusion with same-named companies.

The Unified State Register (EDR)

In the EDR extract, check:

• the status of the legal entity or FOP — “registered”, “in the process of termination” or already “terminated”; a contract with an entity under liquidation is a red flag;
• the director and their powers — whether the signatory may act without a power of attorney, and whether their term of appointment has expired;
• the ultimate beneficial owner (UBO) — missing data or a “nominal” beneficiary calls for further questions;
• the types of activity (KVED codes) — whether the subject of the contract matches the declared activity (a firm whose only KVED is “consulting” supplying equipment looks suspicious);
• the registration date — a company created just before a large deal warrants closer scrutiny.

The VAT payers register

If you are counting on a VAT credit, make sure the counterparty is actually a registered VAT payer and that its registration was not cancelled as of the transaction date. The data is available in the open VAT Payers Register on the DPS portal. A tax invoice from an entity without valid registration gives no right to a credit.

The list of risky payers (Cabinet of Ministers Resolution No. 1165)

The mechanism for suspending the registration of tax invoices classifies payers as risky under criteria set by Cabinet of Ministers Resolution No. 1165. If a counterparty shows signs of riskiness, its invoices may be blocked, and working with it draws the attention of supervisory bodies. This is not necessarily a signal to walk away, but it is certainly one to deepen your check and document the reality of the supply more carefully.

The second level: court history and debts

Status registers are a “snapshot” of today. Court history shows the counterparty’s behaviour.

The Unified State Register of Court Decisions (EDRSR)

By name or EDRPOU code, look at whether the company appears in:

• commercial disputes as a debtor that systematically fails to perform its obligations;
• tax disputes over unreal transactions (a direct warning sign);
• criminal proceedings connected with fictitious enterprise or tax evasion.

The Unified Register of Debtors and enforcement proceedings

Open enforcement proceedings, account seizures or arrears (including wage and tax debts) point directly to solvency. A supplier with dozens of proceedings is unlikely to reliably deliver on a prepaid contract.

Bankruptcy cases

Check whether insolvency (bankruptcy) proceedings have been opened — such information is published, and the process itself is governed by the Bankruptcy Procedures Code of Ukraine. Signing a contract with prepayment in favour of a bankrupt debtor is a near-guaranteed loss of funds in the creditors’ queue.

The third level: sanctions and connections

A separate block that is often ignored — wrongly so.

• The sanctions lists of the National Security and Defence Council (RNBO) — check both the company and its beneficiaries and directors. Deals with a sanctioned person may be prohibited by law or later challenged, and your reputation is exposed.
• Data from the National Agency on Corruption Prevention (NAZK) — in particular, the portal identifying persons linked to the aggressor state and the Unified State Register of persons who have committed corruption offences.
• Links to sanctioned persons — where the ultimate owner is on a sanctions list through a chain of companies. Here the UBO data from the EDR proves useful.

For businesses subject to financial monitoring, this check is also a legal requirement under anti-money-laundering law — supervision in this field is exercised by the State Financial Monitoring Service (Derzhfinmonitoring).

Signs of a “fictitious” counterparty

Years of expert work produce a recognisable portrait of a risky partner. No single sign is a verdict on its own, but a cluster of them is solid grounds to decline or to intensify the check.

Sign	What to watch for
Mass registration address	Dozens or hundreds of firms “registered” at one address; no real office or warehouse
Freshly created	Company set up shortly before the deal, tailored to one large contract
No resources	No warehouses, transport or equipment for the declared volume of supply
No staff	Headcount of 0–1 despite significant turnover; a riskiness criterion
Nominal director	Director heads dozens of companies or clearly does not grasp the business
KVED mismatch	The subject of the contract does not match the declared types of activity
Illogical chain	Goods “out of nowhere”: the supplier never bought them anywhere

A practical tip: if the deal is large or the partner is new, do not stop at the registers. Live contact — photos of the warehouse or production, a meeting at the office, verifying the goods are actually there — often exposes a sham faster than any document.

Building a counterparty dossier as evidence of diligence

The most important part, and the one most often skipped. A check you did not record does not exist as far as the tax authority and the court are concerned. The purpose of the dossier is to show that, at the moment the contract was concluded, you acted in good faith.

What is worth keeping in a separate folder (paper or electronic) for each significant counterparty:

1. An EDR extract with its date of issue.
2. Confirmation of VAT-payer status as of the transaction date (a screenshot or register extract).
3. Copies of constituent documents, the order appointing the director and, where needed, the power of attorney for the signatory.
4. Screenshots of checks against the debtors’ registers, court decisions and sanctions lists, each dated.
5. Commercial correspondence, quotations and the agreement of terms.
6. Documents confirming that performance was real: consignment notes, receipt authorisations, warehouse records, photos, acceptance acts and payment data.

Each screenshot should ideally be dated. In a dispute, the decisive factor is precisely that the check was done beforehand, not retroactively.

Common mistakes I advise avoiding

• Signing “on trust” and keeping no evidence of any check. The most common and most expensive mistake: the transaction may be perfectly real, but there is nothing to defend it with.
• Checking only one register. A clean EDR guarantees neither solvency nor the absence of sanctions.
• Ignoring signs of riskiness for the sake of a lower price. Saving on the check turns into a lost credit that dwarfs the saving many times over.
• Not updating the dossier in long-term relationships. A partner’s status changes; for long contracts the check should be repeated periodically.
• Confusing diligence with concealment. The aim is not to “cover tracks”, but to hold an honest, complete and dated set of evidence that the deal was real.

Conclusion

Checking a counterparty is a manageable, three-tier procedure — basic registers, court and debt history, sanctions and connections — with a recorded dossier as the result. The half hour spent often saves a business from additional assessments, blocked invoices and criminal risk. The depth of the check should be proportionate to the stakes: for a small one-off purchase, the basic registers are enough, but for a large prepaid contract or a new key supplier it is worth working through all three levels and documenting every step.

If you are facing a large or unusual deal, a contested situation with the DPS, or already see signs of unreal transactions, an independent economic analysis of the documents is warranted. As a forensic economic expert — working within the limits set by the Law of Ukraine “On Forensic Expertise” — I help assess the risks early and build an evidence base that will withstand scrutiny. Get in touch for a consultation: sorting it out is always cheaper before signing than after.