Reorganization of the enterprise by way of consolidation or merger with another company
Consolidation means that a legal entity is consolidated with another existing company — a successor. In case of merger of two or more legal entities a new legal entity, successor, is established. In both cases the legal consequences are the same. The successor takes over all rights and liabilities of the former enterprise, including the outstanding ones, as well as those not recognized or disputed by the parties and those that are not apparent at the time of reorganization. Accordingly, the responsibility to pay taxes, fines and penalties of the reorganized legal entity shall be imposed onto the successor no matter whether the latter was aware of such prior to the reorganization or not. The former enterprise will be deemed non-existent from the moment a respective entry is made into the Uniform State Register of Legal Entities (USRLE).
The main advantage of this method is as follows: In the event of successful completion of the reorganization procedure the former enterprise shall be considered to have ceased its activities upon making the respective entry into the USRLE. All its liabilities shall be transferred to its legal successor, including outstanding ones and those that have not been identified at the time of the reorganization. Furthermore, where in case of voluntary liquidation there is a 90% probability of field tax audit leading to imposing of additional taxes, fines and penalties, in case of reorganization the situation is quite the contrary. In practice, in 90% of the cases where an organization is not a major taxpayer or outstanding debtor, tax audit is not performed. Probably this is due to the fact that in case of reorganization the responsibility to pay taxes, fines and penalties still remains with the legal successor and their imposing shall not present a problem, considering that the tax authorities do not have a physical capacity to promptly audit all reorganized companies. Besides, even if a tax audit will be scheduled after the resolution on reorganization, it doesn’t necessarily mean that the reorganization will be suspended, considering that under Art. 50 of the Tax Code of the RF the responsibility to pay taxes, fines and penalties lies with the legal successor.
Under the aforesaid procedure the taxpayer doesn’t need to take any individual actions in order to be taken off the register. In the event where the tax department where the reorganized company had been registered is not aware of the fact that the company has ceased its existence due to reorganization by way of consolidation/merger and requests any records, it should be sent a copy of the certificate of the closure of business along with a letter of the former manager of the company stating that the latter is no longer an officer of the company and the latter have ceased its existence in result of reorganization,and all respective records have been handed over to the legal successor under a acceptance act. Apart from that a statement should be submitted to the Department of the Federal Tax Service requesting an entry to be made into the USRLE at the location of the legal entity on cessation of its activities with the certificate and extract from USRLE issued by the regional tax department attached.
The main disadvantage is the existence of a legal successor. While the legal successor remains formally active a threat of their being held liable for the activities of the predecessor companies and as a consequence imposition of subsidiary liability onto the former founders and managers by the tax authorities and other creditors remains. But it will be much more difficult to do. Apart from that, taking into consideration the provisions of the articles of the Civil Code of the RF, the purpose of reorganization must be conduct of business activities and not a simplified liquidation of reorganized legal entities. In the latter case the reorganization can be disputed. There are precedents where the tax authorities were applying to court and winning cases in the action for recognition of the successor’s registration due to the fact that the successor does not carry out any business activities, is not present at the registered address, does not submit accounting records, does not settle existing indebtedness or pay taxes.
To our mind, this method is worth considering. Taking into account it disadvantages, it can be viewed as a basic but not the final one in the process of liquidation. The disadvantages do not seem insuperable especially if the successor gets registered in a more remote and loyal region than the one where the predecessor was registered in. The same region can later become the “burying ground” for the legal successor in the process of its official voluntary liquidation. We should also keep in mind that the fact of registration of a legal successor automatically means termination of activities of the reorganized predecessor and taking thereof off the tax register.
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