Corporate transformation is a process that requires interdisciplinary cooperation. Its success depends on the joint efforts and collaborative thinking of tax, legal, and accounting professionals.
Transformation processes are very lengthy, as they can affect multiple corporate structures and administrative areas, and may take up to 6-9 months. During the process two reports must also be prepared.
What is corporate restructuring, and when is it scheduled?
Corporate restructuring may change the structure, ownership, operation, and legal form of a company.
Types of corporate transformation:
- Change of legal form: e.g. from a limited liability company to a Plc. public limited company.
- Merger: This may be an absorption, where one company is dissolved into another, and the successor company receives the assets and liabilities. Or it may be a consolidation, where two companies become one. The legal predecessors cease to exist, and the new company takes over the assets and liabilities of the other two.
- Demarcation: a reverse process, where one company can be split into several companies, which is called a demerger. Or a business unit can be spun off from a larger company, while the legal predecessor continues to operate, which is called a spin-off.
- Liquidation: The dissolution of a company without a legal successor is called liquidation. It can be initiated if the company is not insolvent, the claims are collected, the debts are paid, the assets are assessed and distributed among the owners. It must be completed within 3 years with a court of registration cancellation.
When is the best time to start the transformation process?
Although transformations can be
started at any time, it is still most advisable to start major reorganization
processes affecting the corporate structure at the end of the year or during
the first months related to the annual closing. Although the process can be
started during the year by preparing an interim report, which is
additionally reviewed by the transformation auditor, it is better to
align the start or end of the transformation with the annual closing, as this
saves at least one additional report. Incidentally, the interim balance sheet
can only be used for three months, while the annual report dated December 31
can be used for up to six months. (There are exceptions to this, of course,
such as when assets are revalued at their present value, in which case the
report can only be used for three months.) The best chance of saving double the
work is with a transformation timed for year-end which is the most efficient
time from a tax and accounting perspective.
Taxation of the transformation
The transformation raises a number of tax issues, such as whether tax should be paid on the increase in the value of the company. If the company’s assets and wealth are revalued during the transformation, revealing hidden profits, then—as a general rule—the revaluation difference must be taxed in the predecessor company’s tax return prepared as of the date of the transformation. In addition, for certain assets, such as real estate, transfer taxes may also be due, and VAT obligations may arise on the transferred assets.
All of this can be avoided through
proper tax planning of the transformation. The gain related to the revaluation
of assets can be made tax-neutral at the company level through a so-called preferential
(tax-favoured) transformation; however, this regime is not applicable in
all cases and is subject to strict conditions. However, if the transformation
meets these conditions, tax deferral for corporate income tax purposes and
exemption from transfer duties can be applied.
- Preferential (tax-favoured) transformation, tax deferral
The increase in value arising at the predecessor does not have to be taxed immediately; the tax on the revaluation difference is then spread over the useful life of the assets transferred to the successor. This regime can only be applied under certain conditions.
- Exemption from duties
Beneficial
transformation also allows mergers and demergers involving real estate assets
to be exempt from property acquisition duty.
In addition to the above, the VAT Act
also allows for a tax-neutral treatment of the transformation, provided that
the applicable conditions are met.
- VAT exemption for transformations involving legal succession.
The transfer of assets in a transformation does not qualify as a sale of goods, provided that the legal successor fulfils the documentation requirements prescribed by law, meaning that no VAT is payable.
"With the tax advisors, accounting experts, auditors, and lawyers at LeitnerLeitner and LeitnerLaw, your transformation plans are in safe hands. Our comprehensive services enable smooth coordination, precise timing, and the avoidance of unnecessary steps."
Accounting and legal tasks in transformations
Transformation is a complex process
that requires coordinated work in multiple areas, regardless of when it is
scheduled!
- Accounting: At the level of the predecessors, the accountants must prepare the financial statements, which must be audited by the usual auditor in accordance with the applicable regulations. In addition, for the successor, a draft balance sheet of assets and an inventory must be prepared. The closing date associated with the start of the transformation represents only a technical closing: the sub-ledgers are carried forward, and accounting continues without interruption. A so-called multi-column financial statement is prepared, showing the situation before the decision in one column and the post-transformation situation in another. The documents of the transformation must be certified not only by the regular auditor but also by an independent transformation auditor. As the conclusion of the transformation, the final balance sheet of assets and inventory must be prepared, based on the data of a subsequent financial closing, reflecting the date of registration with the company registry.
- Legal tasks: The lawyers must prepare the transformation plan, the new articles of association / deed of incorporation, handle publication for the public, and then take care of the registration with the company registry. The owners – as a general rule – make decisions in two stages: first on the preliminary transformation plan, and then on the final documents to be submitted to the company registry. The resolutions, draft balance sheets and inventories, as well as certificates of publication, must be submitted to the company registry.
- Tax advisory: The tax advisors must calculate the taxes, examine the possibility of a favourable transformation, obtain a statement from the tax authority (NAV) confirming that the company has no tax liabilities, and submit the tax returns. In addition, we facilitate a smooth start of operations for the successor by registering the employees, transferring the assets into the books, and setting up the appropriate depreciation.
The transformation may also refer to the renewal of organizational processes, structures, and systems. This may also require auditing and due diligence, as well; however, this type of change does not necessarily have to be conducted under legal supervision, publicly, or in connection with company registration.
As we can see, the success of the transformation requires the coordinated work of tax, legal, and accounting professionals. The reporting date is a critical link in the chain, determining deadlines and tax planning opportunities. Through comprehensive and consistent preparation of documentation, resolutions, responsibilities, and a detailed transformation plan, the company minimizes risks, whether legal, tax, or creditor sanctions.
