Page 259 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes shareholder nor the liquidating subsidiary recognises any gain or loss in the liquidation. So,
before one can embark on a study of tax planning in case of liquidation, it is absolutely vital to
understand the concept of liquidation along with its tax implications and considerations. The
purpose of this unit is to enable the students to comprehend basic expressions. Therefore, all
such basic terms are explained and suitable illustrations are provided to define their meaning

and scope.

11.1 Concept of 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. The liquidator has responsibilities to all of the creditors of the

company and he becomes the proper officer of the company for tax purposes. Unlike the position
for insolvent liquidation where there is very little scope for tax planning as the sole concern of
the liquidator will be to minimise corporation tax liabilities and to maximise any claims or relief
in solvent liquidations there may be considerable scope for the liquidator to undertake some tax
planning. Liquidation of a business involves selling the assets of the fi rm paying liabilities and
distributing any remaining assets. Liquidation may result from the sale of the business by mutual
agreement of the partners from the death of a partner or from bankruptcy.
A formal corporate liquidation typically involves an adoption of a plan of liquidation necessary

local law notifications to various interested parties winding down of business operations
distributions of assets and the eventual dissolution of the corporate law shell. As a practical
matter however many corporate attorneys prefer to simply merge a corporate subsidiary into its
parent as a means of eliminating the subsidiary because corporate law merger procedures are
often less onerous than the more formal liquidation procedures.

11.1.1 Definition of Complete Liquidation

When companies cease their business operations, they go into a process of complete liquidation.
This process essentially involves the dismantling of the company into its assets and the conversion
of those assets into cash. Complete liquidation can be initiated by the owners of a company the
creditors of a company or a court based on a petition by stakeholders of the company.
(i) Winding Up: Once a company is ordered to liquidate, it will typically remain a going
concern long enough to wind up its operations. This might include fi lling remaining
orders paying suppliers satisfying contracts still in place or other unfinished business. 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 fi nancial diffi culty.
(ii) Liquidation of Assets: After businesses affairs have been wound up it will then liquidate
its remaining assets, these assets could include inventory equipment land and buildings
among other items. Depending of the nature of the companies business and the market
for its assets the company may be forced to liquidate those assets at a signifi cant discount
relative to their true value or their original cost.

Example: A railroad company that goes out of business because its route is no longer
profitable will have a hard time selling its track and may have to dismantle its tracks and sell the

component parts at a signifi cant loss.
(iii) Repaying Creditors: After the companies’ assets have been converted to cash the company
must repay creditors for any outstanding debts. For a company that has gone bankrupt
there may not be enough money to repay all creditors. In such a situation the creditors with

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