COVID-19 #13 Liquidation of negative net equity companies


In many groups, the current year financial performance will not meet the budget set at the start of the financial year. The current crisis is immeasurably affecting the economic landscape. When companies are no longer capable of funding their own operations, shareholders may be called to provide financial support.

In circumstances like these, it is – from a tax perspective – generally acceptable for a shareholder-company to help its subsidiaries in financial distress in order to maintain the group’s commercial and financial standing. However, shareholders may not always have the financial resilience (or willingness) to back the business any longer and may see no other option than selling off the distressed assets. This may leave the shareholders with entities having nothing else than a negative net equity and (shareholder) loans.

As a bankruptcy procedure may cause unsolicited reputational damage, bankruptcy is mostly seen as a measure of last resort. Instead, shareholders tend to look into alternatives to orderly liquidate any remaining companies. But what if these companies have a negative net equity position?

Item#13: Liquidation of negative net equity companies

An obvious way to liquidate companies with a negative net equity is to restore the company’s equity first – e.g. by contributing the (shareholder) loan to the share capital or by waiving the (shareholder) loan – and to liquidate the company next. As we highlighted before, a debt-to-equity swap has its specific challenges from a tax perspective. Debt waivers on the other hand, may give rise to an additional tax cash-out. This is especially true if these (shareholder) loans largely exceed the amount of the available tax attributes.

Another solution could be to directly dissolve and liquidate the company without first settling the (shareholder) loan (i.e. so-called negative net equity liquidations). In these instances, a formal liquidation procedure – with the appointment of a liquidator and the approval of the liquidation balance sheet by the court – will be required as the (shareholder) loan remains as a liability on the closing balance sheet.

In addition, as the realisation value of the remaining assets (if any) is expected to be insufficient to repay the outstanding liabilities, creditors should formally agree to resign to collect their receivables before the liquidation of the distressed company can be closed.

Although it has taken some time to get a first position of the Belgian Ruling Office on the tax treatment of such liquidations, they have accepted that such liquidations cannot be assimilated to an implicit debt waiver for tax purposes and may be implemented without adverse tax consequences (obviously only to the extent that the taxpayer is capable of demonstrating the economic rationale for proceeding with such a transaction).

Although we are still at the start of this crisis, no doubt a new wave of negative net equity liquidations can be expected in the months and years to come.

 

While most companies have applied for the COVID-19 measures available by now, we see that quite some groups struggle to monitor closely their short-term (and certainly mid-term) cash position and how to manage and optimise it further to steer their company through this crisis in the best way possible. We meanwhile have created the following email platform: be_covid19@pwc.com in order to give you a sounding board in these challenging times.