Liquidation of a company: what taxes do you have to pay?

When the members of a company agree to liquidate it and distribute its assets, certain fiscal responsibilities are generated, in addition to the Corporate Tax, which must be complied with. Learn which taxes you must pay and avoid last minute surprises when liquidating a company, let’s get to it!

Are taxes due at the time of liquidating your company?

The answer is yes. When a company reaches the end of its life, it generates a series of taxes -which may involve a high amount to be paid- that must be complied with. Especially if the organization has high-value assets such as real estate and even cash.

In order to liquidate your company, there cannot be debts to third parties other than the partners. If so, it is very likely that the notary public will not grant the public deed for the liquidation.

If there are debts owed to third parties, the only option to freely liquidate the entity will be to initiate a voluntary insolvency proceeding.

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Is dissolving and liquidating a company the same thing?

The dissolution of a commercial company entails its extinction and total closure, i.e., there is no going back.

When we talk about liquidation, we refer to one of the phases of the dissolution where the assets are distributed among the partners, after paying the outstanding debts and collecting the credits.

In that sense, the action of liquidating a company is encompassed within the different types of corporate restructuring. Only this would be the last step you would want to take.

It is normal that, when we speak of liquidation, we usually think of an action carried out by a creditor or debtor. However, it refers to a process carried out by the company itself.

That is to say, if it were not for this decision, there would be no need to take this type of action, so we could say that it does not depend on any external factor but on internal factors.

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Who can request the dissolution of a company for subsequent liquidation?

A company is dissolved when the motion is approved by the majority of shareholders at a general meeting and subsequently published in the BORM.

Then, the liquidation and dissolution of the company will be carried out by one or more liquidators appointed by the general meeting of shareholders, if one has not been appointed before.

If one has been appointed, he/she will continue in office. However, if there are no shareholders or administrators, the court will appoint one.

It may also happen that the administrators are liquidators. If so, they will relinquish their position and will be replaced by other administrators appointed by the judge. The former administrators, then, will have to collaborate with the liquidators when they are required to do so.

The General Shareholders’ Meeting will continue to be held as normal and the liquidators will have the task of reporting on the progress of their work at these meetings.

What taxes must be paid when liquidating a company?

During the liquidation stage, the company will continue to be subject to corporate income tax and will be taxed according to the regime applicable prior to the dissolution in question.

The following are the taxes that must be paid at the time of liquidation of a company:

Corporate income tax (IS)

When a partnership is liquidated, a profit or loss must be computed for the difference between the market value of the assets that are transferred between the partners and their net book value.

In the event that these assets include real estate, it is normal that their market value has increased since their acquisition. Therefore, it will be evident that it is a benefit for which taxes must be paid.

In order to reflect this higher market value, the company must compute a positive off-balance sheet adjustment in the corporate income tax return. Thus, it will have a similar effect to the one that would derive from having sold the assets to the partners at a price equal to their real value.

Partners individuals: Personal income tax

In addition to the taxation thereof for corporate income tax purposes, individual shareholders must declare in their personal income tax return the difference between the actual value of the assets received and the acquisition value of their shares.

Such gain or loss must be computed in their Personal Income Tax (IRPF) within the savings taxable base. Thus, they will be taxed at a rate between 19% and 26%. Unlike legal entity partners, individual partners do not enjoy an exemption.

As a bonus: if a partner acquired his shares before December 1994, he will be able to apply a reduction on the profit obtained, reducing his taxation.

VAT

When distributing the goods among the partners, the partnership must charge them the corresponding VAT on the same terms as if it were selling them to third parties. In this case, the company must issue an invoice for each asset transferred and report the VAT charged to the tax authorities.

The transfer of assets and rights to the partners will not be subject to VAT if all or part of the business assets are acquired by a single partner. Furthermore, such assets -or the parts into which they are divided- will be able to operate autonomously.

For this purpose, the acquirer or acquirers must continue to carry out an economic activity with the assets received.

ITP-OS

A company in liquidation under the Corporate Transactions modality of the Transfer Tax (ITP-OS) must pay this tax, which is payable by the partners and amounts to 1% of the value of the assets and rights awarded to it.

In this case, the taxable base will coincide with the actual value of the assets and rights that were delivered to the partners, without deduction of expenses and debts, the taxpayers being the partners who receive such assets.

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Are you looking for a complete tax advice during the process of liquidating a company? At TAS Consultancy our professional managers will guide you with excellence in every step of the process. Likewise, if you are looking to bring your business idea to Spain, in TAS Consulting we help you to open your company in 24 hours, contact us through our email tasconsultoria@tas-sl.es!