Tax aspect of liquidation of companies have their own specific characteristics in relation to the general corporate tax regime.
The most common tax questions which arise regarding the tax aspect of liquidation of companies are:
- assessment of tax on corporate profit of companies in liquidation and
- tax treatment of payments of the liquidation surplus.
Assessment of tax on profit of companies in liquidation
Generally according to the provisions of Article 34 of the Corporate Profit Tax Law, taxpayer’s profit in the process of liquidation shall be taxed in accordance with that law.
However the tax aspect of liquidation of companies varies depending on the starting date of the liquidation.
Companies which have begun liquidation before December 26 2014, which for some reason have not completed the process of liquidation yet, shall assess the tax on profit in accordance with the law, which was in force until December 25 2014.
According to provisions of Article 34, paragraph 2 of the Corporate Profit Tax Law, which was in force until December 25 2014 the profit of a taxpayer shall be determined in the liquidation proceedings as the positive difference between the taxpayer’s assets at the beginning and at the end of the liquidation proceedings, or as the difference in assets during the liquidation proceedings for which the tax declaration and fiscal balance sheet should be submitted, as determined in the financial statements submitted in keeping with the regulations dealing with accounting and auditing, where the initial balance of the liquidation period is equal to the balance at the end of taxation period preceding the start up of liquidation proceedings.
So there are two parallel regimes of assessment of tax on corporate profit of companies in liquidation:
- taxpayers that began liquidation before December 26 2014 shall assess the tax on profit according to the old rules, ie. these taxpayers assess the taxable profit as a positive difference between the property of the end and the beginning of the period for which tax return and a tax balance shall be submited
- taxpayers that began liquidation at December 26 2014 or later, assess the tax on profit in accordance with the applicable provisions of Article 34 of the Corporate Profit Tax Law ie. these taxpayers assess the tax base in tax balance based on the profit reported in the income statement for the period for which tax return and tax balance shall be submitted.
Assessment of tax on profit of companies in liquidation according to the applicable rules
The applicable rules on assessment of the tax on profits of the companies in liquidation apply those taxpayers whose registration date of the liquidation decision and publication of an advertisement on the initiation of liquidation is December 26 2014 or a later date.
Tax aspect of liquidation according to the applicable rules of assessment of the tax on profits of the companies in liquidation involves the execution of the following obligations:
- Submiting of tax return and tax balance after the commencement of liquidation within 60 days from the day of the commencement of liquidation as at the day preceding the day of the commencement of liquidation.
Companies in liquidation, in the course of liquidation, are not obliged to pay the advance payment of the tax on profit. - Submiting of tax return and tax balance after the completion of liquidation within 60 days from the day of completion of liquidation as at the date of completion of liquidation.
- Submiting of tax return and tax balance when the liquidation is not completed by the end of the year in which it is initiated, the taxpayer in liquidation is required to submit a tax return and tax balance for the period since the commencement of the liquidation until December 31 of current year within 180 days from the date of expiry of the period for which the tax is assessed.
Assessment of tax on profit of companies in liquidation according to the old rules
The old rules on assessment of the tax on profit of the companies in liquidation shall apply those taxpayers whose registration date of the liquidation decision and publication of an advertisement on the initiation of liquidation is December 25 2014 or an earlier date.
Tax aspect of liquidation according to the old rules of the assessment of the tax on profits of the companies in liquidation involves deadlines and ways of submitting of the tax returns and tax balance sheet, as well as the method of assessment of the taxable profit for taxpayers in liquidation, according to the rules, which were applied until December 25 2014.
Deadlines for submission of tax returns and tax balance
under the old rules
According to provisions of Article 34 paragraph 3 of the Corporate Profit Tax Law the Corporate Profit Tax Law, which was in force until December 25 2014., it has been prescribed that any taxpayer in relation to whom the liquidation proceedings have been instituted shall file with the competent tax office an announcement and a tax statement, as on:
- The date of institution of liquidation proceedings – within 15 days from the date of forwarding the financial statements in keeping with the regulations dealing with accounting and auditing
- The date of completion of liquidation proceedings – within 15 days from the date of forwarding the financial statements in keeping with the regulations dealing with accounting and auditing.
The method of assessment and paying of tax on profit of the companies
in the liquidation which apply the old rules
The basic specificity of the tax on profit assessment of the companies in liquidation, in relation to the general regime of taxation of legal entities, according to the old rules, consists in the method of assessment of the tax base of these taxpayers.
The basis for the assessment of taxable profit is the balance sheet not the income statement.
The presentation of data in the tax balance sheet
Taxpayers in liquidation to which the old rules shall be applied, fill in the tax balance sheet in the same form as other payers of tax on profit, ie.on Form PB1.
Tax treatment of the liquidation residue
Liquidation residue represents the company assets remaining after settlement of all liabilities of the company, which is distributed to the company founders.
Tax aspect of the liquidation, which relates to the treatment of allocation of the liquidation residue to the founders is the same for all payers in the liquidation, regardless of when the liquidation is initiated.
According to the provisions of Article 35 paragraphs 1 and 2 of the Corporate Profit Tax Law, the liquidation residue or excess of the bankruptcy estate in cash or in non-monetary assets over the value of invested capital, which shall be distributed to members of the company against which ended the process of liquidation or bankruptcy procedure is completed, it is considered as the dividend.
The value of non-monetary assets is equal to its market value.
Thus, a positive difference between a sum of the liquidation residue and market value of non-monetary assets (as a liquidation residue in non-monetary form) and the value of the invested capital, it is considered as the dividend which members of the company in liquidation exercise. In other words, the respective positive differential has a tax treatment of dividends, which depends on who is a member of the company that receives this dividend – whether it’s natural or legal person, whether resident or non-resident.
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