みなと国際会計事務所 Accounting Intelligence blog by a CPA in Tokyo

みなと国際会計事務所 Accounting Intelligence blog by a CPA in Tokyo, tax tips, accounting, running business

Company liquidation debt waiver and corporate tax

time 2017/06/11

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.

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