What to Ask Before Winding Down an Entity Abroad
By Wanying Zheng, Advisory Manager
Last year, my colleague Kathryn Polak published a post on the importance of legal entity rationalization, which is the process of reviewing an organization’s legal structure to determine if all existing entities are necessary. As she nicely puts it, through rationalization “companies may be able to build more efficient, sustainable operating structures, improve operational transparency, and significantly reduce risks and costs.”
This post is intended to complement that excellent piece. And in a related post, I include some real-life examples from my own experience helping clients wind down entities abroad. Together, the posts should give readers an appreciation of what’s involved in this important — and often overlooked — area of international operations.
I’ll begin by going over some common reasons our clients wind down an entity. One reason is that an organization changes its corporate strategy and then finds that one or more entities are superfluous. Or, an organization may find a drop in demand for its products or services in a particular market, ultimately leaving it with no employees in that country and no plans to hire more. Or it may want to change one entity type for another; for example, it may want to establish a subsidiary and dissolve a representative office after testing out a market and finding it to be promising for the long term. Or, an organization may need to wind down an entity after its operations in that country have been acquired by another organization.
Some of these scenarios won’t necessarily involve a detailed review of an organization’s corporate structure. If a company terminates all its employees in another country, for example, it won’t take an expert to figure out that it may make sense to dissolve the entity there.
As we’ve noted, however, there are real benefits to regularly reviewing an organization’s structure to uncover possible efficiencies, some of which might be brought on by the dissolution of certain entities. As a structure gets more complex, it is imperative to examine the function and attributing factors of each entity within the organization.
When reviewing your structure, you’ll want to be guided by the idea that each legal entity should be performing its role supporting the success and growth of the business, and not becoming a burden or adding no value. You’ll also want to ask specific, practical questions when deciding whether to wind down a particular legal entity. Here are some useful questions:
- Is the entity still engaging in any business activities or transactions?
- Are there any employees being paid through the entity?
- Are the entity’s accounts healthy?
- Is the entity still profitable or contributing to the success of related companies by offering appropriate services?
- If the organization isn’t profitable, does it promote the organization’s strategy and objectives in other ways, such as by promoting brand awareness and cross-border e-commerce?
- How difficult and costly is it to wind down an entity compared to setting up an entity should the need for an entity again arise in that jurisdiction?
It’s important to note that although winding down an entity can promote organizational efficiencies, it can be expensive and time-consuming, and the decision to do so may not always be clear even after careful consideration. Most companies consider entity dormancy before starting a formal wind-down process.
Many jurisdictions do not require an official application to make an entity dormant, though you will be required to continue fulfilling compliance obligations. That said, ongoing compliance obligations may be reduced during dormancy, depending on the country. In Singapore, for instance, it’s possible to submit an application to the Inland Revenue Authority to waive tax-return filing obligations for a dormant company.
In other jurisdictions, dormancy can be more time-consuming and expensive. In Korea, for example, an application for an initial six months of dormancy is required, and renewal can be extended subject to the agreement of the relevant authorities. As a result, dormancy in Korea is often considered a short-term solution.
In a related post, I discuss what to expect when winding down an entity, including some real-life examples.