Founding a limited company has been made easy, but its dissolution has not. The dissolution of a limited company is a strictly regulated process that requires both company law and tax matters to be handled carefully and in accordance with the law. At least six months should be allocated for dissolution.
Everything has its time and place – including businesses. Sometimes business comes to an end, or it’s no longer possible to continue it. Once the decision to cease operations has been made, it’s not simply a matter of informal notification. The dissolution of a limited company is a strictly regulated process where both company law and tax matters must be handled carefully and in accordance with the law.
If the company being dissolved has more assets, the entrepreneur should always use their own auditor or lawyer when assessing taxation in connection with the dissolution, and/or request an advance ruling from the tax authorities. Obtaining an advance ruling from the tax authorities usually takes 6-8 weeks.
The following examines the voluntary liquidation of a limited company through the winding-up process. A limited company can also be dissolved through bankruptcy proceedings or corporate arrangements, upon which I have written separately.
During the liquidation procedure, the company to be liquidated is represented by the liquidator. A limited company is as a legal subject until it has been dissolved through liquidation proceedings. The purpose of liquidation is to ascertain the company's financial position, convert the necessary assets into cash, pay off debts, and distribute any surplus to shareholders or others as stipulated in the articles of association. Liquidation proceedings conclude with the dissolution of the company when the liquidators present a final account at the general meeting.
During liquidation, the company's normal business operations are wound down. Since the company's legal personality is maintained even during liquidation, the company can still enter into contracts and, for example, incur new debt. On the other hand, the liquidation procedure aims to realise the company's assets and pay its debts, so as a general rule, the company's business operations must be wound down.
STAGES OF THE INSOLVENCY PROCEEDINGS
The voluntary dissolution of a limited liability company through liquidation is a multi-stage process that typically takes around from six months to a year depending on the complexity of the company, its assets, and the demands of creditors. The following steps describe the key elements of the liquidation process in general terms:
- Resolution of the General Meeting: In most cases, the decision to place a company into liquidation is made by the general meeting of shareholders. The decision requires a two-thirds majority of the votes cast and the shares represented, unless the company's articles of association require a higher majority. The general meeting of shareholders appoints one or more liquidators, whose task it is to manage the winding-up procedure from start to finish. The liquidator solely represents the company during the liquidation procedure.
- Notice to the Trade Register: When a company is put into liquidation, the liquidator registers this with the trade register. In addition, the liquidator must apply public challenge to the company's creditors. In a public challenge, creditors are given a deadline within which they must declare their claims against the company. The aim of this is to ensure that all of the company's debts come to light before assets are distributed to shareholders. This takes approximately 4 months.
- Realisation of assets The liquidator's most important task is the realisation of the company's assets, meaning their conversion into money. This applies to all of the company's assets, including real estate, rights related to the business, and other assets. Realisation is particularly needed for paying off debts, but also for distributing shares to shareholders.
- Paying debts All known debts of the company shall be paid before any assets are distributed to the shareholders. If any debts are disputed or not yet due, the liquidator may set aside separate funds for their payment.
- Preparing the final accounts Once the liquidator has dealt with the realisation of assets and the payment of debts, they shall draw up a final account. The final account shall also include a report on the liquidator's administration and an explanation of the distribution of the company's assets. The final account shall be presented to the general meeting of shareholders.
- Payment of the down payment: Finally, the liquidator distributes the remaining assets to the shareholders as a so-called distribution share. The distribution share can be cash or other assets, and it is paid according to the shareholder's number of shares. As a general rule, the distribution share is given in the final stages of the liquidation procedure, but under certain conditions, payment of an interim distribution share is also possible.
- Trade Register Notification: Once the final accounts have been presented and approved at the general meeting, the liquidator shall register the final accounts in the companies register and submit a notification of dissolution. The company is considered dissolved when the liquidator has presented the final accounts at the general meeting.
About verification
The dissolution of a limited company generally results in tax consequences for the dissolving company itself and for the shareholder receiving a distribution. The dissolving limited company is taxed for the last time for the tax year ending with the dissolution. Dissolution signifies the cessation of the company's business activities, during which the company disposes of all its assets. The date of dissolution is considered to be the day the liquidator provides the final accounts to the general meeting. The tax effects of the dissolution are allocated to the year of the final accounts.
If the company being dissolved has more assets, the entrepreneur should always use their own auditor or lawyer when assessing taxation in connection with the dissolution, and/or request an advance ruling from the tax authorities. Obtaining an advance ruling from the tax authorities usually takes 6-8 weeks.
The taxation of a company in liquidation
In the taxation of a demerging limited company, all assets are valued at their fair value: the disposal price for current assets, investments, fixed assets, and other assets is considered to be the amount corresponding to the probable disposal price of the asset, i.e. its fair value. As a result of calculating the disposal price, the company generates taxable income in the normal way in three ways:;
- Deductions made – depreciation – taxes refunded to taxable income
- Upon acquiring an asset, the so-called passive capital gain – the difference between the probable sale price and the acquisition cost – shall be taxed as the company's income.
- the bookings made are cancelled
In legal practice, goodwill, trade names, or client registers arising from a company's own operations have not been considered assets whose fair value would be recognised when liquidating the company. However, if part of the goodwill consists of separately transferable intangible assets (such as exploitation rights, patents, trademarks, or manufacturing, design, or licensing rights), the fair value of this part must be recognised.
Similarly, dissolution can realise capital losses from the sale of assets if the part of the acquisition cost that has not been depreciated is likely to exceed the sale price.
Taxation of a personal shareholder in a demerged limited company
A distribution received by a shareholder is equated to a disposal where shares are exchanged for cash or other assets. If the fair value of the distribution exceeds the acquisition cost of the shares, a capital gain arises, and if the acquisition cost is greater, a capital loss arises.
The amount of capital gain or loss is generally calculated by subtracting the acquisition cost of shares from the market value of the shares. The shareholder In taxation, the acquisition cost of assets received as a distribution is considered to be the fair value of the transferred asset. Unlike, for example, mergers and demergers, the dissolution of a limited company is not a general succession for tax purposes. Consequently, the calculation of the holding period for shares and other assets transferred from a dissolving company to the recipient of a distribution begins at the moment the distribution is received. The date of receipt of the distribution is normally the date of the general meeting of shareholders at which the liquidator has presented the final accounts. If assets have been distributed as an advance distribution, the date of receipt is deemed to be the time of the transfer of the advance distribution. If real estate or securities have been received as a distribution, the shareholder will incur a liability for transfer tax.
When calculating a capital gain for a partner, the fair value of the share is reduced by either 1) the actual acquisition cost of the shares or 2) the amount determined by the so-called acquisition cost assumption (20 %or 40 %) based on the holding period of the shares, if it is greater than the actual acquisition cost. The acquisition cost assumption is 40 %if the shares have been held for more than ten years and 20 % if the shares have been held for less than ten years.
The capital gains tax rate in 2024 is 30% % for the first €30,000 and 34% % on income exceeding this amount. Capital losses can be deducted from net capital gains in the tax year and during the five subsequent years as profits accrue.
Amos Attorneys at Law Oy
www.amoslaki.fi