Due Diligence and Care: what documents need to be requested before entering into business transactions with contractor

Recently concept «Due Diligence and Care» is often mentioned in the business environment. First time this concept was mentioned in the Resolution No. 53 of the Plenum of the Supreme Arbitration Court of the Russian Federation of 12.10.2006: «On the assessment of arbitration courts of the grounds for receipt of tax profit by taxpayers». According to the mentioned Resolution, «tax benefit can be qualified as unjustified, if it is proved by tax authorities that taxpayer acted without «due diligence and care» and he should be aware of violations made by contractor, in particular, due to interdependence or affiliation of taxpayer to contractor».

Currently under «due diligence and care» is meant measures on investigating contractors before entering into business transactions. It includes complex of measures on confirming the following: whether the contractor is legally registered, or it is «fly-by-night» company, whether the contractor has adequate financial and human resources, or is able to execute the contract commitments.

According to the letter of the Federal Tax Service of the RF №3-7-07/84 of 11.02.2010 as part of investigating contractor «taxpayer can ask his contractor for copies of articles of association; certificate of registration in the Unified State Register of Legal Entities; Certificate of Registration with the Tax Authorities; copies of licenses (in case when business transactions are made within the context of licensed activities); orders certified the director`s right to sign documents; information about tax or administrative liabilities attached to the director».

Depending on collected information and on kind of business relations it is good practice to ask for additional documents. According to experience of specialists on investigating contractors, list of the above mentioned documents may be completed with:

• notarized copy of the director`s passport,
• notarized financial account for the year previous to the year of making a transaction,
• confirmation of qualified personnel for the declared work/service accomplishment,
• letters of reference and confirmation of contractor`s generalized experience,
• information about working, storage facilities and/or showrooms,
• extract from the cash flow on bank account for the last six months and others.

It is believed that investigation of collected information let secure the entrepreneur from bad-faith contractor and copies of documents can become further evidence of execution of measures on «due diligence and care», for example, while investigating your company by the federal authorities.

It should be noted that contract with the supplier of information services – Information Agency Credinform, company business reports and extract from the Unified Register of Legal Entities of the RF (EGRUL) / Unified State Register of Sole Entrepreneurs (EGRIP), received from the Information and Analytical System GLOBAS-i®, can be also additional evidence of «due diligence and care».