Before Dissolving the Company, Understand the Legal and Tax Aspects Regarding Liquidation!

In the business process, liquidation is the last option that may never be expected by any business actor. Liquidation is the dissolution of a company as a legal entity which includes payment of obligations to creditors and distribution of the remaining assets to shareholders of the company.

However, under certain conditions, liquidation is sometimes unavoidable and can actually be the best option to resolve the company's problems. Although there are legal and tax consequences that must be considered by business actors before choosing this option.

This issue is very relevant to discuss considering that the COVID-19 pandemic has triggered an economic crisis and hit many companies.

Therefore, MUC Attorney at Law in collaboration with MUC Consulting held a webinar entitled “Discussing Legal and Tax Aspects of the Company's Liquidation Process”, Tuesday (29/03/2022).

In the webinar, MUC Consulting's Tax Partner, Meydawati, reminded decision-makers within the company to really do good planning before liquidating the Company in order to minimize the risks that arise, especially in terms of law and taxation.

"Don't let the liquidation process cause legal problems or raise tax issues," said Meydawati.

Cause of Liquidation

Questions that arose in the discussion included, what are the things that could underlie the company's liquidation decision?

Mawla Robby, Senior Associate of MUC Attorney at Law explained, that financial problems usually make the company's condition less stable and can trigger failure to pay obligations. This condition often forces shareholders and management to liquidate as a last resort.

In his presentation, Mawla quoted Law number 40 of 2007 on Limited Companies, which describes the 9 causes for the forced dissolution of the company as follows:

1. Decision of the General Meeting of Shareholders (GMS);
2. Termination of the Company’s duration;
3. Based on the court order;
4. Due to the revoked bankruptcy statement based on binding order of the commercial court, (the bankrupt assets of the Company are not sufficient to pay the bankruptcy cost);
5. Due to the condition that the bankrupt assets of the Company have been declared in the condition of insolvency
6. Due to the revocation of the Company’s business permit;
7. Prosecutor's application;
8. Legally defective in the articles of incorporation; and
9. The company is unlikely to survive

The Liquidation Process

According to Mawla, there are several stages and implications of the dissolution of the company. First, after the liquidation is carried out, all assets resulting from the liquidation are distributed to creditors and if there are any remaining, it is handed over to the shareholders.

Furthermore, the management of the company is transferred to the liquidator/curator appointed by the GMS or if there is no appointment, the Board of Directors can act as liquidator. At this stage, the company cannot take any legal action other than liquidation.

If they violate the previous points, the board of directors, the member of board of commissioners, and the company shall jointly or severally liable.

Then, after including the title "in liquidation" behind the name of the company, the legal actions of the limited company are only those related to the liquidation process. The final stage is to issue a liquidation-based financial report.

Mawla also stressed that the liquidation process must be planned as well as possible. Especially regarding the Termination of Employment (PHK) employees, treatment of company assets, debts, and receivables, to calculate the estimated costs that must be incurred, including potential taxes.

Tax ID Deletion

Regarding the tax aspect, Sigit Wibowo, Tax Director of MUC Consulting emphasized the tax administration process that the company must go through related to the liquidation process. In particular concerning the rights and obligations of the company as a Corporate Taxpayer (WP) which will be completed when the company is officially dissolved.

"Companies that are declared closed must delete their Taxpayer Identification Number or NPWP, in accordance with the Director General of Taxes Regulation PER-04/2020," said Sigit.

The deletion of the Tax ID number can be done in two ways, through the e-registration application or the taxpayer comes directly to the Tax Office (KPP).
Problems usually arise, if the Tax ID deletion process has issues. For example, the documents that must be attached turn out to be incomplete, so the process can take a long time. Therefore, the company must ensure that all documents required in the Tax ID deletion process are met, such as the deed of dissolution of the company or similar documents.

In the process of the Tax ID deletion, usually, the tax office will conduct an assessment to ensure the presence or absence of tax debt. If there is still a tax liability, the Tax ID cannot be deleted. "The Tax ID deletion process can be time-consuming due to the tax findings," said Sigit.

Therefore, Sigit reiterated that before deciding on liquidation, make sure all tax obligations have been settled. Because, if it has become a tax officer's findings, it will be subject to a sanction in the form of administrative sanctions or other tax risks.

For information, #JUSTISE is a discussion program about business law initiated by the law firm MUC Attorney at Law since 2020. This event is hosted by experts and practitioners who are competent in discussing the latest legal and business legal issues.