Companies in Japan may decide to close down and liquidate all assets for a variety of reasons. In all cases the process will be easier and cost less when net assets are positive.
When the company has positive net assets the liquidation process is straight forward and simple, only requiring a resolution to close the business to be made during a shareholder meeting. From that point, a firm can have their lawyer or judicial scrivener to handle the legal filings.
The process becomes more complicated when the company’s net assets are negative. Keeping in mind that liabilities are not limited to loans or payables to third parties, but also include inter-company loads such as those incurred when parent companies help to cover the operating expenses of a subsidiary.
When a company’s assets are negative it is required to file a Special Liquidation Process (特別清算) with the court so as to protect creditors during the liquidation process.
In order to avoid the extra time and costs associated with the Special Liquidation Process filing many companies choose to have their parent company waive their debt before passing the resolution to dissolve the company. If that results in positive net assets for a company, they can then file for a Voluntary Liquidation Process. (解散登記)
You might think that because the company has more Blue carried-losses (青色欠損金), than the amount of loans to be waived, there should be no tax by the waiver.
It’s true that a current loss can be carried forward for the following ten years if the company’s tax payer status is “Blue” at the time the loss was incurred. If this is the case, future profits can be offset by losses from the previous ten years. But you will need to make sure that company qualifies.
There is a special tax rule which defines how much of a loss can be used against future profits based upon the ownership structure and paid in capital. If a company is 100 percent owned by a large-sized company, defined as any company that has paid-in capital of more than JPY 500 million, it can only use carry forward losses up to 50 percent of the current year’s income. It would then have to pay corporate tax on the remaining income.
If the amount of the debt waiver is large, the corresponding tax would also be large.
Losses can only be carried forward for ten years. If the amount of the carry forward losses is large the size of the loans that will need to waive in order to achieve a net positive asset scenario may be larger than the active losses being carried forward. In this case you may have to pay corporate tax on the loan amount not covered by the past losses.
If the company’s tax status was “White” when the loss was incurred, the loss cannot be carried forward to offset normal income. However, both expired losses and “White” losses can be used can be used to offset the gain from a debt waiver after the voluntary liquidation process has been filed with the court.