Page 274 - DCOM508_CORPORATE_TAX_PLANNING

Unit 11: Tax Planning for Liquidation

11.5 Summary Notes

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.
Liquidation may result from the sale of the business by mutual agreement of the partners
from the death of a partner or from bankruptcy.
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.

The Companies Law provides for liquidation procedures for the various types of companies
including General Partnerships Limited Liability, Companies Private Shareholding
Companies and Public Limited Companies.
Generally when a person is experiencing extreme fi nancial distress income tax liability is
not a major concern.
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.
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.

In theory, the tax consequences of liquidation should be the same whether the corporation
sells assets to a third party and then distributes the proceeds to its shareholders or simply
distributes all assets in liquidation.
At general law, distributions made by a liquidator on the winding up of a company are a
receipt of capital, not a dividend.

11.6 Keywords

Cessation: In Cessation, a company stops business operations.

Corporate Assets: Something valuable that an entity owns, benefits from, or has use of, in
generating income.
Creditors: An entity (person or institution) that extends credit by giving another entity permission
to borrow money if it is paid back at a later date.

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.

Parent Company: Firm that owns or controls other firms which are legal entities in their own

right.
Partnership: A partnership is a strategic alliance or relationship between two or more people.

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