Why do companies dissolve? The common-sense answer? When a company ceases to do business, why keep it? Keeping dormant zombie companies incurs expenses for accounting and auditing, not to mention filing endless monthly VAT tax returns (even with no income), income tax returns, annual balance sheets and other mandatory filings.
The dormant company will also have to receive unwelcome guests when the area revenue officers visit once a year to ask uncomfortable questions about why it’s no longer doing any business but still around.
Under Thai law, when a company stops doing business, the company and its directors are obligated to formally close it down.
Every January, it’s important to keep in mind the usual annual deadlines that kick in with the start of a New Year. For dissolving companies, those deadlines may be affected.
The first month of the year is when Thai companies generate balance sheets to showcase their performance for the year that just ended. They have four months – until April 30 – to table the balance sheet and an auditor’s report for consideration of an annual general meeting of shareholders, or AGM. One month beyond that, the directors are legally bound to file a copy of the audited balance sheet with the Department of Business Development, or DBD.
As for companies in the process of dissolution, the last day of the last fiscal year is not Dec. 31. It’s whatever date the dissolution is registered with the DBD. The five months therefore begin counting from the date of registration.
One thing worth remembering is that those first five months, or 150 days of the year, also carry significance for filing at another government agency, the Revenue Department, this time under the tax code: Company directors must file tax returns and pay corporate income tax by the deadline.
It’s important for companies focused on dissolving and liquidating at the DBD not to forget what is required by the taxman afterward. Directors of the company, in the role of liquidators, must notify the revenue office in the area of the dissolution so the tax authority can perform an audit and ascertain exactly how much tax the company has to pay before it disappears.
After the registration of the dissolution, directors of the company will become its liquidators to wind it down. That means compiling lists of assets and liabilities, selling off the assets and getting the proceeds to pay its liabilities. Any money left would be distributed to shareholders. Traditionally, the taxman will be one of the creditors waiting to be paid. It will take a couple of months for the company to win approval from its creditors for the dissolution.
Now let’s consider the case of joint ventures, regardless of whether they are Thai-Thai JVs or Thai-foreign ventures. Let’s posit a company that is doing well and paying itself handsome profits, but the partners cannot stand each other, culturally and politically. They can’t exit by selling their shares to a third party either under the Joint Venture Agreement. Buying each other out gets stuck over a pricing issue.
It’s time to dissolve the company. Fortunately, the JV agreement is flexible enough to allow a departure route by way of dissolution. As with other companies, it must stop doing business, get the approval of its creditors, liquidate its assets and liabilities and distribute the remaining capital to shareholders.
If that returned distribution exceeds the capital invested in the shares since the beginning, the shareholder attains a taxable capital gain. If the capital distribution falls short, marking a loss in investment, no income tax liability applies.
Another possible reason for a company to call it quits is when a merger or acquisition is involved. This means selling its whole business to a rival in an Entire Business Transfer, or EBT, exercise. A huge one-shot income is more than accommodating a corporate income tax liability of the company on the profit it makes; the profit is transformed into a dividend paid out to all shareholders. But the sad truth is the company no longer holds any business and has to close shop – the only way investing shareholders can now cash out of the legal entity: wind it down, sell any remaining assets, satisfy the creditors, and return the capital to its owners.
In the Family
Family business disputes can likewise lead to the dissolution of a company. People of the same bloodline, parents, children, uncles, aunts, siblings, cousins, grandmas and other relatives doing business together – they aren’t necessarily on the same page. One contributes land, another pitches in money, the third relative is highly educated and very smart, the fourth is a people person, the fifth is a marketing genius, the sixth an IT techie, the seventh an all-round management type – and they all contribute in their own way, though not equally in importance and rewards.
Conflicts among these loved ones should first be solve by a shareholders’ agreement, family constitution, reorganization of the family business structure, use of a holding company and an operating company. Dissolution can come in as the last option.
Whatever the cause for the dissolution, two things are very likely to happen: a tax audit by the revenue area office and a value-added tax exposure.
Nearly all company dissolutions will encounter a tax audit to ensure that the taxman’s right stands above all other creditors. A tax audit typically means additional tax expenses assessed by the officials. A company whose business is registered for the VAT will be deemed to sell all the assets remaining as of the date of the dissolution registration at, subject to a 7 percent VAT based on market price, even if there are no sales in reality. Many companies, ignorant of this post-dissolution exposure, are caught by surprise due to the unexpected surge in their tax liability.
In determining whether or not to dissolve a company, these two factors will feature significant in the board room.