What to Expect When Winding Down an Entity Abroad
By Wanying Zheng, Advisory Manager, Radius
In my most recent post, I addressed the subject of legal entity rationalization and what to ask before winding down a legal entity abroad. This post discusses what to expect after you’ve decided to move forward with dissolving an entity. It also explores some real-life examples of some of the challenges an organization will face when winding down an entity in a particular jurisdiction.
When a client does decide to move forward with winding down an entity, they invariably ask: What’s involved and how long will it take? Saul Howerton provides some excellent general information related to that question in his post, “When You’re Gearing Up for International Expansion, Remember That You May Have to Wind Down.” I encourage you to read the entire article, but I’ll reiterate here some of the steps he mentions. Keep in mind that the list below isn’t exhaustive and that all countries have their own unique requirements. Still, it’s a good indication of what’s usually required when winding down an entity abroad.
Generally speaking, then, in order to successfully wind down an entity, that entity must:
- cease trading
- not have any outstanding tax liabilities (and may be required to produce a tax-clearance letter) or have any debt due to any other host-country government agency
- have an external audit performed on its financial statements
- not have any outstanding charges in its register
- not be involved in any court proceedings inside or outside the host country
- not have any current or contingent assets and liabilities on its balance sheet (i.e., the balance sheet must be “zeroed out”)
- obtain the consent of its directors
In most countries, you should plan on at least six months to completely wind down an entity, though timelines can vary considerably by country. It can take up to twelve months, for example, to dissolve the common KK-type entity in Japan.
While understanding these general requirements is useful, multinationals should keep in mind that each country will present its own challenges, some of which may be easier to plan for than others. To provide a more comprehensive idea of what it takes to dissolve an entity abroad, let’s look at some real-life requirements from various countries.
Filing Returns in Japan
During and after an entity deregistration, the owner may have to fulfill financial reporting and tax compliance requirements, often under tight deadlines.
An organization dissolving a subsidiary in Japan must file a consumption tax return, a corporate tax return and a business and inhabitant tax return for the following periods:
- from the end of the last financial year until the date of dissolution (the filings must be made within two months of the dissolution date);
- from the day after dissolution to the date when all assets are distributed (the filings must be made within one month of the date of the asset distribution).
Obtaining Revenue Authority Tax Clearance in Malaysia
In most jurisdictions, you will have to obtain tax clearance from local authorities in order to wind down. In Malaysia, this process involves submitting a request to the Inland Revenue Board. In order to dissolve the entity, the tax authority must conduct an audit. The entire process typically takes three to six months.
It should be noted that while there are similarities between the tax clearance processes of many countries, the revenue authorities of each country will have their own specific rules and practices. It is critical to understand the idiosyncrasies of your jurisdiction’s authorities to obtain swift tax clearance.
Changing Representative Officers in China
It’s not uncommon for the directors or authorized signatories of subsidiaries to change during the deregistration process. The costs and administrative burdens associated with updating the associated corporate documents should not be underestimated, especially if your entity doesn’t have local representation. In China it can take three to four months to change representative officers.
It’s worth adding that in a number of jurisdictions, directors remain liable for certain corporate liabilities, even after their resignation.
Considering the Wider Corporate Structure in Singapore and China
Depending on the country, the ability to deregister an entity may depend in part on the organization’s overall group structure. In a recent wind down I was involved in, the client had an entity in Singapore, along with entities in Shanghai (a subsidiary) and Hong Kong (a branch). The organization planned to liquidate the Singapore entity, which had been dormant for a number of years.
Despite the dormancy, the Singapore wind down was held up for over two years because the liquidation of the Singapore company could not be completed without first deregistering the organization’s Shanghai subsidiary. In addition, the client planned to deregister the Hong Kong branch, and that process could not commence until the Singapore parent company had also started liquidation.
In winding down as in so many areas of international expansion and operations, it’s critical to understand exactly what is required under local law and how those laws are enforced. Performing due diligence in this area will enable you to set realistic timelines, budgets and expectations during the legal entity rationalization process or whenever you may be faced with the prospect of dissolving an entity in one of your countries of operation.