月別: 2017年6月

There are some major restrictions to liquidation of a company that you should know.

First, a company with negative net asset is required to have a court involvement in the process of liquidation. To avoid the additional cost and prolonged legal schedule, you will probably want to choose “a voluntary closure”, which will not require any additional legal steps.

To do so, its parent company usually has to waive its loans owed by its subsidiary. This waiver has to be executed by a written document to be on a safe side.

Second, the gain from a debt waiver is regarded as taxable income, and not all the carried loss is allowed to offset.

Carried losses are categorized into three categories. One is called Blue NOL (Net Operating Loss), the others are called “Expired” or “White”.

Blue NOL is ok to offset anytime against income. Problems are:

1) if it is categorized as a big corporation by the tax law definition or a subsidiary of a big corporation, Blue NOL can be used only a part of the taxable income a year (55% for a fiscal year that starts until Mar 31, 2018 and 50% for as fiscal year that starts After Apr. 1, 2018).

So, if you waive your loan owed by subsidiary to you during a normal fiscal year, you will still end up having to pay income tax (even though your intention of your waiver was just to shut down a loss making subsidiary without any additional legal cost)!

To avoid that awful situation, the waiver has to happen only after the resolution date of the company dissolution. To prove that the company made such resolution, you should register to the legal bureau (法務局) that the company is under the dissolution process.

When you close the subsidiary, you will probably have to waive the loan because a liquidation of a company with negative net asset will require a court involvement. Because a court involvement will take unnecessarily more time and cost, you will probably want to avoid the situation, if possible.To avoid an court involvement, a subsidiary to close down has to have a positive or zero asset (not negative). Therefore, its parent company will need to give up its loan officially.

By putting the company under the dissolution process and presuming that the residual asset will be nil, it will be able to claim its expired NOL and White NOL.

So, this is the next trap. You need to be careful in deciding how much to waive. If the waiver is too big and leaves the liquidating company with positive residual asset, it will be taxed on the income that are not offset against Blue NOL. If the waiver is not enough. The company will end up with negative net assets, which will lead a court involvement.

Blue NOL is carried loss incurred in the period when a company’s tax status is Blue (as opposed to the period when a company is categorized as White). Blue tax status is a tax privilege granted by the tax authority to a company for keeping its accounting record in double-entry system and having no records of serious tax breaches. Blue NOL expires in 9 years.

2) Second, very important rule is that NOL of a “dormant company” will not be allowed to offset, if its shareholder changes completely. This rule was introduced to prohibit then rampant practice where one buy a dormant company with lots of NOL to offset against expected future income.

Sometime, it still happens that a company wants to sell its subsidiary which was loss making and now dormant to split from its consolidated balance sheet. But now that its shareholders are completely changed, the subsidiary’s accumulated loss will not be allowed to be used. Be careful.

When liquidating a subsidiary of a foreign corporation in Japan, you need to be careful about the timing of giving up loans by the parent company. It may cause a tax issue.

You will need to forgive your loan to the liquidating company because it has to be positive in net asset for voluntary liquidation which will be much smoother and easier than ordinary court process. If a company has more debt than assets and is negative in net asset, the process will be more complex and expensive because it will take more court involvement such as an appointment of an external lawyer etc.

Giving up a loan by the parent company may incur taxable income in its subsidiary, which can cause additional corporate tax burden. That should not make any sense to you if you are giving up the loan because you want to close down the company to stop its bleeding.

Your thinking will probably be “Are we paying additional tax because we waived a loan that was required to liquidate the loss generating company?” The debt waiver is required because

The general rule is that if a company is waived of a debt, the waiver should be recognized as income, because the forgiven company does benefit by being freed of the loan.

And this income can be offset against the net operating loss (NOL) carried from the past. NOL can be carried over for 10 years if the tax color of the loss-making company was blue. Loss in periods when the company’s tax color was white can not be carried over.

So one of the possible problem is you don’t have enough blue NOL or NOL is expired after 10 years, you will end up with possibly large amount of taxable income and having to pay the corporate tax.

To avoid such situation, you will have to resolute liquidation and make sure that there will be no residual asset.
Corporate Tax Order 12－3－2 (By National Tax Agency)

In real world process, the steps to be taken should be as following:
1) Resolute liquidation, and file the liquidation registration to Legal Registration Office (法務局).
2) Prepare balance sheet and PL at the time point of the resolution and file tax return with in two months.
2) Decide the amount of loan waiver so that its residual asset will be zero. To decide such amount, you will need to calculate tax to be paid.
3) Waive the loan
4) Pay back all the liability after the waiver, so that the remaining asset will be zero after paying tax.
5) Register its completion of liquidation (清算結了登記).
6) File tax return for the period between the resolution and the completion of the liquidation.

It is not that hard, if you know the steps to be taken. The only point is that it has to resolute and register the liquidation and decide the amount of debt waiver so that the residual asset will be zero.