Japanese Tax Blog in English

日本の税務情報を英語で書くブログ by みなと国際会計事務所

Liquidating a company and carried losses (blue and white)

time 2019/10/19

Net asset has to be possitive to start a voluntary liquidation

For whatever possible reasons, any companies may decide to close down and liquidate. Many companies, that accumulated losses by funding from a parent company overseas, have a large amount of loans as a history of covering their operating expenses while there were no enough revenues to cover.

The legal process to close down a company will be straight forward if the company has a net positive asset. You just need to resolute the closure in your shareholder meeting and ask a lawyer or legal scrivener to take care of the legal procedures.

The tricky part is when the company’s net asset is negative, which means it has more liabilities than assets. The liabilities are not limited to loans or payable to third parties but include inter-company loans too. The company has to file to the court for Special Liquidation process (特別清算) to protect creditors. It will be costlier and will take longer to complete the process.

Debt waiver by its parent company to be positive in net asset

In order to avoid this costly legal process, many companies choose to have their parent companies to waive their debt “before” they resolute and file for a voluntary liquidation process (解散登記). You may think that because the company has more Blue carried-losses (青色欠損金), than the amount of loans to be waived, there should be no tax by the waiver.

Blue Loss

Yes, a current loss can be carried forward for the next 10 years and the company’s tax payer status has to be “Blue” at the time the loss is incurred. And in future when the company makes a profit, the loss carried from the past 10 years can be offset against the profit.

But wait a minute. Please check the size of paid-in capital in your parent company. There is a special tax rule about how much can be netted for a company whose is owned 100% by a large-sized company. If its paid-in capital is more than 500 million yen, it is regarded as a large-sized company. If you unfortunately meet this criterion, you can use the amount of carried loss only up to 50% of current year income. That means that you will have to pay the corporate tax on the remaining half of the current income. If the amount of debt waiver is huge, the tax can also be huge.

Expired carried loss:

You also need to be careful about how old these losses are. If they are more than already 10 years old, they should already be expired. You can not use it any more. If the carried loss is huge because it has been accumulated over many many years of losses, the amount of loans you need to waiver in order to make the company’s net asset positive may turn out to be bigger than the active carried loss which is not expired yet. In this situation, you are in trouble because you may have to pay corporate tax in order to avoid the costly court process.

White loss

If its tax status is “White” when its loss is incurred, the loss is not be carried over.

Even expired loss and white loss can be used to offset the gain from waiver after the liquidation process has been registered.

There is also a special rule about expired carried losses. Expired loss and white loss can be used to offset against the gain from waiver only after the (voluntary) liquidation process is filed to the court.


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