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Winding down entities – What to consider before going ahead

Entering a new host country and setting up a new entity in order to do business there is an exciting time for any organisation. In administrative terms however, the amount of work required and the check list of items to cover off before being able to legally and practically employ people is almost overwhelming. By contrast, at the other end of the entity lifecycle, the tasks required to wind down an entity may initially appear much less demanding. Fill in some forms, pay employees, move out of the office, no? Well, not exactly. When you consider that every aspect of the admin required to set up an entity also requires action when you decide to close an entity, you can begin to see that its no small task.

So the first question you may wish to clarify is – is this wind down completely necessary? Is the company sure that the entity won’t be required in future? Having to wind an entity down and then start it up again a few years down the line makes absolutely no sense if it’s possible for the entity to lie dormant in the meantime and there are no negative tax or particularly onerous ongoing complications involved in doing this. It may be that there are advantages to having a presence in a specific country – even if only for the purpose of retaining visibility in that location – rather than simply closing the business.  Take advice and explore every option before taking action.

The most important point to make is that timely due diligence to understand requirements is vital, as regulations differ from country to country – getting advice as far in advance is important to avoid extra costs and/or penalties. Winding down an entity in France will be a similar process to conducting the same exercise in, say, Singapore, but there are country variations beyond the scope of this article, and country requirements vary in complexity. China, for example, is known for having very complex wind down processes requiring notifications to multiple authorities. Therefore, find a reputable advisor in the field in the country in question, and take advice. If you’re dealing with the US, remember that requirements will vary from State to State, so be sure to take appropriate advice.

In terms of timelines, again, these will vary, but you should reckon on between six and twelve months to completely close an entity, depending on the level of complexity involved. You’ll need to consider how you will manage this transition period (do you need to retain staff in the country?) and the costs involved – failure to do this will mean that you may have to account for extra staffing requirements and ongoing / one off costs long after the entity itself has ceased being economically productive.

Let’s look at the key areas you’ll need to consider once you’ve established this is the right path to take.

People

Clearly if you have employees employed by the entity in question arrangements will need to be made for them. If you’re going to be making them redundant, you’ll need to consider your obligations from an employment law perspective – consultation requirements, statutory notice periods, outstanding amounts owed including legally due severance or other payments and the associated costs of handling these items.  Don’t forget your ongoing payroll obligations to any remaining staff during the wind down period. Where you wish to retain your staff beyond closure, what alternative arrangements will you need to put in place for them? If you are transferring them to another overseas entity, discussions with the employees regarding their new locations, remuneration packages and relevant contract arrangements will need to be agreed long before the entity is closed. Where you have international assignees based in the location, repatriation considerations will need to be taken into account, including practical issues such as immigration notifications, payment of any outstanding tax obligations, accommodation lease closure, arrangements for children’s schooling and associated costs, etc.

Finances

In terms of financial activity, the first action is to ensure that the entity has ceased all activities and trading, and that the company is not owed money for services provided. Once this is done, consider the state of the company’s accounts in terms of debts. Is any money owed to any third party (vendors, landlords, utilities companies, employees?) Establish what the outstanding amounts are, and when they will need to be paid. Ensure that sufficient funds remain in order to cover the cost of subsequent wind down activities. Pay any debts to third parties immediately. Prior to wind down, a company’s balance sheet should be zeroed out.

In many countries, you’ll also need to organise an external audit on financial statements prior to wind down; you may require audit clearance before going ahead with the closure. If the company has any capital investments, these will need to be liquidated and the funds obtained. When you have the funds, consider what will happen to them – can you transfer them out of the country or are there restrictions on this? 

Finally, once you have dealt with all of these items, you’ll be in a position to close down the company bank accounts and transfer any remaining funds to another overseas company entity (providing, again, that there are no restrictions on your ability to do this).

Tax

Corporate tax filing requirements will differ from location to location but will usually involve filing a final return to the relevant authorities. In some countries, as with the financial statements, an audit may be required before the entity can be signed off for closure. These form filling requirements are likely to be onerous, and in some countries, a tax clearance letter may be required once the forms have been completed and submitted in order to authorise the company for full closure.

Legal

In terms of legal obligations, it may sound obvious but it is important to ensure that the entity is not involved in any court proceedings or employment tribunals before taking action to close it.

It’s also worth considering where the entity sits in the company “family tree”. In long established companies which are truly multinational, and particularly where mergers and acquisitions have taken place over the years, there may be subsidiary companies or branches which are linked to the entity in question which will be affected by the closure of the entity. Check to ensure when there are multiple entities in the location in question, whether there is any knock on effect resulting from the closure of one entity, if the entities are related. You may find that what you thought was a standalone entity may be the parent company or subsidiary of another – which will require a different process entirely, or extra steps.

Directors

Prior to closing down any entity, the consent of the Directors must be obtained, plus their formal resignation. They will need to complete various forms for submission to the relevant authorities. It’s important to remember that Directors may retain liabilities beyond the dissolution of the entity – they may, for example, remain liable for any legal proceedings brought against the company post wind down, or for certain financial obligations. It’s important to check the requirements for the company in question and ensure that your Directors are happy to continue with their obligations. If the Director is not a citizen of the country in question and will be leaving the country post wind down that may give rise to its own complications – it’s vital to take advice on these matters in good time.

Property and IT

If you have office premises, you’ll need to terminate the office lease (check whether early termination fees apply and what the notice period is as soon as you know that the wind down will occur). Regarding office property, this will need to be either distributed or sold. This includes office furniture and supplies etc. Consider how you’ll handle this, particularly if you have no staff in country. Don’t forget electronic files – company records should be maintained (there may be a specific timeline on this, again, take advice) so ensure that all electronic files are transferred to an alternate entity prior to wind down.

Employer of Record

An alternative to consider when entering a new foreign market is the use of an Employer of Record. This allows a company to avoid the time and expense of local incorporation, and instead utilize a GEO local employer of record such as Shield GEO.  One of the benefits of using a GEO solution for setting up a foreign branch is the simplification of the closure process if that becomes necessary. Because Shield GEO acts as an employer of record, there are fewer deregistration steps to comply with, and most of the tasks of closure will be logistical for the client.  Shield GEO will handle final payroll, tax payments, visa issues and other local compliance requirements. However, the company may still need to handle certain other administrative steps such as liquidation, payment of creditors and transferring funds and bank accounts.

Caitlin Pyett is a Mobility industry veteran with 20 years’ experience gained in London and Singapore. Currently in Hong Kong due to her husband’s recent relocation, she now finds herself in the unenviable position of “trailing spouse” – a fresh perspective on mobility after 20 years! Caitlin is available for senior in house opportunities in HK, mobility consulting work and freelance writing assignments. She can be contacted on +852 9655 6657 or connect with her on LinkedIn. 

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