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Unit 11: Tax Planning for Liquidation

(iii) If capital assets such as real estate are sold to pay debts capital gains may result from the Notes
sale.
(iv) An alternative minimum tax may be imposed on preference income that includes the
portion of capital gains that individuals do not include as income.
(v) If a taxpayer negotiates an arrangement with his creditors to transfer property to the
creditor in forgiveness of the debt such debt forgiveness may generate ordinary income.

11.2.1 Affect of Appointment

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. Once the liquidation has begun, the tax accounting period can only be
brought to an end by the expiry of 12 months following the start of the tax accounting period or
the conclusion of the liquidation.
The company in liquidation will lose beneficial ownership of its assets and therefore the company

in liquidation will be degrouped from its subsidiaries for group relief purposes. However, by
virtue of Section 170(11), a company in liquidation will remain part of a capital gains group. It is
not clear in the cases of solvent liquidations (where shareholders may be said to have signifi cant
influence over the liquidator’s actions) whether or not shareholders continue to exercise control

over the company for the purposes of Section 840 of ICTA, 1988. Where shareholder control is
lost the company will no longer be connected with other group companies for the purposes of
transfer pricing and loan relationship legislation.

11.2.2 Cessation of Trade

The company is likely to cease trade on the appointment of a liquidator. Where trade and assets
are sold the current period trading losses should be eligible to offset against any capital gains
arising. When a company stops trading a tax account period comes to an end (Section 12(3) of
ICTA, 1988) and any unrelieved trading losses are generally not available to shelter income in
subsequent periods. However, where post-cessation trading income that is taxable under Section
D Case VI arises, such as the release of trading debts, Section 105 of ICTA, 1988 allows trading
losses otherwise extinguished from cessation to be set against such income.

1. Excess management expanses and Schedule A losses cannot be carried forward after the
company ceases to carry out investment business and property business respectively.

2. Excess loan relationship deficits and capital losses are unaffected by cessation of trade and
generally can be carried forward.

3. Where a loss arises in the final 12 months of trading it can be carried back to earlier periods
or, if appropriate, sold to a fellow subsidiary.

11.2.3 Income Tax Treatment upon Enterprise Liquidation

Income tax treatment upon liquidation concerns the treatment of matters such as proceeds from
liquidation income tax liability upon liquidation and payment of dividends in respect of any
enterprise required to be liquidated under the Enterprise Liquidation Law or any enterprise to
be treated as being liquidated under taxation laws and regulations such as conversion from a
legal person into an organisation without legal personality upon the occurrence of economic
acts of the enterprises such as termination of business disposal of assets settlement of debts and
distribution of its remaining properties to the owners. On the basis of the Enterprise Income Tax

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