Please note that upon its liquidation, both a business and the shareholders of that business may be liable to pay additional taxes
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Upon the liquidation of a private limited liability company (Lith. UAB) the remaining assets of the business need to be transferred to the shareholders of a plc. When this happens, tax obligations arise:
1. For a business being liquidated;
2. For the shareholders of a plc.
Tax payable by the business
If the assets of a business being liquidated are transferred to its shareholders, the business shall be liable to pay income tax (5% or 15%). Tax rate of 5% shall apply if the average number of employees on the list of the company does not exceed 10 persons and the income for the tax period does not exceed EUR 300 000 (there are exceptions), if the company does not meet these conditions, tax rate of 15% shall apply.
The tax only applies to the portion of assets in question, i.e. the tax shall be paid on the capital gains, namely, the difference between the fair market value of the assets on the day of transfer and the cost of acquisition of the assets. If the assets being transferred were depreciated, then the cost of acquisition of the assets shall be decreased by the amount of depreciation.
For example, business X is being liquidated. The business owns a car that was acquired at a cost of 35.000 EUR, and the car was subsequently transferred to the business’s shareholders. Prior to the decision to liquidate business X, an amount of 25.000 EUR was calculated in depreciation on the car, leaving it with a residual value of 10.000 EUR. On the day of transfer of the said car, the fair market value of the car was 15.000 EUR. This means that the capital gain on the asset of business X was 5.000 EUR (15.000 EUR – 10.000 EUR). The business will have to pay income tax on the capital gain.
Tax payable for the shareholders
If the assets of a private limited liability company being liquidated are transferred to the shareholders of that business, the following tax shall apply:
1. Corporate income tax (5% or 15%) if a shareholder is a legal person. Tax rate of 5% shall apply if the average number of employees on the list of the company does not exceed 10 persons and the income for the tax period does not exceed EUR 300 000 (there are exceptions), if the company does not meet these conditions, tax rate of 15% shall apply.
2. Personal income tax (15%) if a shareholder is a natural person. The tax rate of 15% applies if the amount of the increase in the value is less than 120 VDU (average salary) and the tax rate of 20% shall apply from the amount exceeding 120 VDU.
Please note that when calculating whether the amount of income does not exceed 120 VDU, not only income from increase in the value is taken into account, but all other income received by the resident during the year, except employment, dividend and individual income.
The amount of income above which the 20% income tax rate is applicable is: in the year 2019 – 120 VDU / in 2020 – 84 VDU / in 2021 – 60 VDU.
The tax shall only apply to the portion of the assets that represents an increase in the value of the assets, i.e. on the difference between the fair market value of the assets received on the day of transfer and the cost of acquisition of the shares held by the shareholder.
For example, shareholder X in a private limited liability company owns shares purchased for 5.000 EUR. Plc X is being liquidated and the car owned by the business is transferred to the shareholder. On the day of transfer, the fair market value of the car is 15.000 EUR. This means that the capital gain on the assets received by the shareholder is 10.000 EUR (15.000 EUR – 5.000 EUR). The shareholder will have to pay personal income tax on this amount of capital gain.
A business being liquidated has to refund VAT on the assets transferred to the national budget in situations when this VAT was deducted. The amount of VAT to be refunded shall be calculated with an allowance for the amount of depreciation realized.
A liquidator is a natural person who performs all business liquidation procedures until the business is removed from the Register of Legal Entities. A chief executive officer, shareholder, employee or some other person may also serve as a liquidator of the business. As a rule, the liquidator is appointed and removed by a simple majority vote of shareholders. Starting from the day of their appointment*, the liquidator assumes all functions of the management bodies of the business.
*The day of appointment of a liquidator is the day when this appointment is registered with the Register of Legal Entities.