Liquidation and how to do it

18.10.2018

Like life, business sometimes ends. As American writer Robert Fulghum wrote, “We can lose our life differently. Death is just one option.” One way to end the “life” of a legal entity is to liquidate it.

Company cancellation and liquidation is not one of the more popular activities that shareholders, agents, lawyers and accountants engage in. The entire process can be quite time consuming, unless the company to be liquidated is properly prepared. The whole liquidation process can be greatly accelerated and streamlined. When dealing with liquidation, we emphasise proper preparation. We are ready to provide our clients with a comprehensive solution, including legal, tax and accounting services.

The shareholders can decide to liquidate the company voluntarily. The company did not meet expectations, the project ended, and the further operation of the company is no longer justified, the partners no longer have a common dialogue and continuing would make no sense… There might be many other reasons. The statutory body is replaced by an appointed liquidator. Its task is to monetise property, pay the company’s debts and divide the liquidation balance among its shareholders.

Another possibility is liquidation based on a court decision where, for example, the company has not had a statutory body constituting a quorum for more than two years. The court will also appoint a liquidator. Forced liquidation can also be a way to avoid insolvency if the company’s assets are insufficient to cover the costs of insolvency proceedings.

During the liquidation, the liquidator will notify known creditors about the entry into liquidation and publicly it in the Commercial Bulletin. In addition, the liquidator shall retain accounting documents after the company’s deletion from the Commercial Register and acquire the consent of the tax administrators (revenue and customs authority).

The accounting side of liquidation includes preparation of the closing statement on the day preceding the entry into liquidation. In it, the liquidator will take account of the non-continuation of the entity, i.e. he will make adjustments related to previously created reserves, adjusting items and accounting assumptions that will not be provably accounted during the liquidation. Other accounting obligations include the preparation of the opening balance sheet as of the date of liquidation and the preparation of the financial statements as of the date of the final liquidator’s report, as well as the proposal for the distribution of the liquidation balance.

Of course, accounting operations also have tax impacts. On the day preceding the liquidation, it is also necessary to compile a tax return for the past part of the year and deal with the above-mentioned operations. During the liquidation period, the liquidated company normally meets its tax obligations. Finally, the liquidator is faced with taxing the liquidation balance. This may deviate from the tax treatment of profits, especially for non-resident taxpayers.

The final steps are payment of the liquidation balance to the shareholders and the settlement of tax, followed by a motion for deletion from the Commercial Register. Upon definitive deletion the company is legally dissolved.




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