Monday, 6 January 2020

Unit 11: Tax Planning for Liquidation

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Unit 11: Tax Planning for Liquidation

A liquidation or winding up is a process whereby a liquidator is appointed to realise the companies’ property and distribute the proceeds to its creditors and thereafter distribute any surplus to the companies’ shareholders.


Liquidation may result from the sale of the business by mutual agreement of the partners from the death of a partner or from bankruptcy.


The process of winding up can potentially take several years depending on the complexity of the business however courts ordering complete liquidation as well as business owners and creditors typically wish to have a short winding down period because it costs money to continue a business that is already facing financial difficulty.


The Companies Law provides for liquidation procedures for the various types of companies including General Partnerships Limited Liability, Companies Private Shareholding Companies and Public Limited Companies.


Generally when a person is experiencing extreme financial distress income tax liability is not a major concern.


The corporation tax accounting period ends immediately before the day of appointment of the liquidator and therefore the first day of liquidation becomes the first day in the new corporation tax accounting period.


Subsidiaries usually have clear differences between their business objectives and the parent company’s, they may work in a different area of the supply chain, or sell entirely different products altogether so the parent company can benefit from revenues.


Liquidation occurs when the parent company decides to end the subsidiary, closing it down and selling all its assets.


In theory, the tax consequences of liquidation should be the same whether the corporation sells assets to a third party and then distributes the proceeds to its shareholders or simply distributes all assets in liquidation.


At general law, distributions made by a liquidator on the winding up of a company are a receipt of capital, not a dividend.


Cessation: In Cessation, a company stops business operations.

Corporate Assets: Something valuable that an entity owns, benefits from, or has use of, in generating income.

Creditors: An entity (person or institution) that extends credit by giving another entity permission to borrow money if it is paid back at a later date.

Liquidation: A liquidation or winding up is a process whereby a liquidator is appointed to realise the companies’ property and distribute the proceeds to its creditors and thereafter distribute any surplus to the companies’ shareholders.

Parent Company: Firm that owns or controls other firms which are legal entities in their own right.

Partnership: A partnership is a strategic alliance or relationship between two or more people.

Corporate Tax Planning Notes 270    Private Limited Company: A private limited company is a voluntary association of not less than two and not more than fifty members, whose liability is limited, the transfer of whose shares is limited to its members and who is not allowed to invite the general public to subscribe to its shares or debentures.

Public Limited Company: A company whose securities are traded on a stock exchange and can be bought and sold by anyone.

Shareholders: A shareholder or stockholder is an individual or institution (including a corporation) that legally owns a share of stock in a public or private corporation.

Subsidiary: A subsidiary is an organisation that a larger business acquired and allowed to continue running its operations.

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