Page 263 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes Law and its implementation regulations following provisions on the specific tax treatment for

enterprise liquidation:
(i) the gain or loss from the transfer of all assets should be recognised based on their realisation
value or transaction value.

(ii) the gain or loss from the cleaning up of debts and debt settlement should be recognised.
(iii) the continuing operation accounting principle should be changed and costs of a withholding
or apportionment nature should be handled.
(iv) losses should be made up in accordance with the law and proceeds from the liquidation
should be recognised.
(v) income tax upon liquidation should be calculated and paid.
(vi) the remaining properties distributable and dividends payable to shareholders should be
determined etc.

11.2.4 Tax Consequences of Liquidating a Subsidiary

A subsidiary is an organisation that a larger business acquired and allowed to continue running its
operations. Subsidiaries usually have clear differences between their business objectives and the
parent company’s, they may work in a different area of the supply chain, or sell entirely different

products altogether so the parent company can benefit from revenues. Liquidation occurs when
the parent company decides to end the subsidiary, closing it down and selling all its assets. While
planning liquidation for a company, we also plan for the liquidation of its subsidiaries which
entails the following consequences:
1. Parent companies have many reasons for liquidating a subsidiary.

Example: If a subsidiary is too far outside the scope of the parent company, the company
may decide to sell it off as a way of moving back to core competencies. If a subsidiary becomes
too expensive to run, it may be more economically feasible to sell it rather than keep. The parent
company may simply want extra money in order to make another purchase.

2. At the corporate level, the corporation will receive a gain or loss upon full liquidation. The

company recorded a specific fair market value for the subsidiary when it was fi rst bought.
Upon liquidating the subsidiary, the corporation will then receive two types of income.
The fi rst type is the money derived from the sale up to the amount that the subsidiary is
worth on the books, which counts as taxable income. The second amount is above the book
value, which counts as a net gain and is subjected to the capital gains tax. A loss allows for
a lower taxable amount. There are also accumulated earnings credits that businesses can
earn and use to reduce taxable income.
3. The gain and loss rules for the liquidation of a subsidiary depend on many different factors,
including the varied laws by which different states operate. However, the company must
sell the subsidiary as an actually division of the company, not just an investment business

it was holding, in order qualify for benefits like an accumulated earnings credit. The
subsidiary must be fully sold, not simply broken apart and redistributed, to qualify for
gains or losses.
4. At the shareholder level, all shareholders will receive remaining assets after liquidation, in

proportion to their ownership (the shareholders not affiliated with the parent company).
The shareholder also recorded a gain or a loss, usually a capital gain or loss, based on the
current fair market value of the stock. Shareholders are allowed to defer gain recognition
until the money is actually received in order to allow for market changes.

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