The Albanian tax implications of the liquidation of a companyALTax
A liquidating dividend is a type of dividend payment made to shareholders. Unlike other types of dividends, the payment is generated by utilizing assets other than income derived from earnings. In some cases, assets may be sold and the cash generated from those transactions used to issue the payments to shareholders. This means of supplying dividend payments to shareholders is rarely used, except in situations where the business is preparing to shut down or liquidate, or a temporary issue with cash flow has developed.
Since a liquidating dividend is not paid out of the earnings generated by the business during a specific period, the transaction is considered a return of capital rather than a return on profits. This creates a situation where the issuer of the dividend payment does not have to pay taxes on the total amount of dividends paid from the capital, since those payments were funded using assets that presumably were taxed previously. The decision to cover the dividend payments from existing capital assets rather than earnings is not left up solely to the discretion of the company. Many tax agencies have specific regulations that require companies to document that the flow of earnings is insufficient to manage the current dividend payments due to shareholders in order to claim that the payments are tax-exempt.
For Albanian tax purposes the liquidation of a commercial company is treated like a deemed sale: the assets/liabilities of the company must be revaluated at their fair market value at the moment of liquidation and a subsequent gain or loss must be included in the company’s taxable profits in the year of liquidation.
To the extent the participation exemption applies, a gain or loss on the shares in qualifying subsidiaries is tax exempt.
Accumulated tax losses or tax credits will usually vaporize upon liquidation.
The liquidation distribution (after revaluation) in excess of paid in capital qualifies as a dividend and may as such be subject to Dutch dividend withholding tax. The Albanian dividend withholding tax rate is 10% (2013), but may be lower by virtue of applicable tax double treaties.
For an up to date overview of dividend withholding tax rates under applicable tax treaties you should see the proper tax treaty which country belong the company.
To the extent the paid in capital originates from a share for share acquisition of shares in Albanian companies, the repayment of capital may be subject to Albanian dividend withholding tax (so-called tainted capital).
The revaluation of loans and receivables may result in taxable currency exchange profits (even if non-realized).
The liquidation of a commercial company implies the end of the fiscal life of a company. After the liquidation process is completed the commercial company must be deregistered with the Albanian tax authorities. For Albanian tax purposes liquidation is final when the liquidation procedure is completed and the company has no assets or liabilities left. This implies that the last book year for tax purposes usually ends later than the financial book year (which typically ends when the shareholders resolution with the decision to liquidate is adopted).
Depending on the specific situation one of the following alternatives may give a better outcome.
The first way is the legal merger instead of liquidation (with possible deferral of taxation of hidden capital gains and avoidance of a taxable dividend);
The second way is the sale as a company (no dividend withholding tax levy over positive reserves);
The third way is the conversion into another legal form (like a tax-exempt portfolio investment company);
This is all about a brief explanation about the rules and procedures for the liquidation of a company voluntary winding up.