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In general, liquidation can be defined as the process of closing a business, where its assets are sold to meet its liabilities (Cambridge, 2023). In Indonesia, the process of company liquidation is regulated under Law Number 40 of 2007 concerning Limited Liability Companies.
Based on this regulation, there are six reasons for liquidation in Indonesia, namely: based on the decision of the General Meeting of Shareholders (RUPS), expiration of the established period stated in the Articles of Association, based on a court decision, based on a commercial court ruling, insolvency of the company's assets declared bankrupt, and revocation of the company's business license.
Furthermore, Article 143 of Law 40 of 2007 also states that liquidation does not result in the company losing its legal entity status until the completion of the liquidation, and the liquidator's accountability is approved by the General Meeting of Shareholders or the court.
Therefore, when related to the provisions of the Income Tax Law, Value Added Tax (VAT), and General Tax Provisions, we can analyze the tax obligations during the liquidation as follows:
Income Tax Aspects
In liquidation, there may be gains from the transfer of assets. This is due to the fact that asset sales during liquidation are recorded based on the market price, while the bookkeeping records assets at their acquisition cost. Consequently, if a gain arises from the sale of assets during the liquidation process, income tax is applicable.
The underlying provision for this taxation is Article 4 paragraph (1) letter d of the Income Tax Law, which states that the object of taxation is income, which includes any increase in economic capability received or obtained by the taxpayer, whether originating from Indonesia or abroad, that can be used for consumption or increasing the taxpayer's wealth, in any form, including gains from the sale or transfer of assets, including gains from liquidation, consolidation, merger, expansion, division, or takeover of a business.
The second Income Tax aspect that may arise in the liquidation process is tax on dividends. As known, dividends are profits distributed by a company to its shareholders (Sullivan, Sheffrin & Steven, 2003). Hence, if a company is liquidated and there are profits distributed to its shareholders, income tax may apply to such dividend distribution.
However, it is worth noting that there is a difference in the tax treatment of dividends before and after 2021. Before 2021, dividends were subject to income tax, where if dividends were distributed to corporate taxpayers with ownership below 25%, Article 23 income tax at a rate of 15% was applicable. On the other hand, if dividends were distributed to individual taxpayers, a final income tax of 10% (Article 4 paragraph (1) letter f) was applicable.
After the enactment of the Harmonization of Tax Regulations in 2021, this provision changed. According to the Harmonization Law, dividends distributed to shareholders are exempted from taxation under certain conditions. One of them is when dividends received by individual taxpayers are reinvested in financial instruments in Indonesia.
The third Income Tax aspect that may arise from the liquidation process is tax on debt relief gain. The basis for this is Article 4 paragraph (1) letter k of the Income Tax Law, which states that gains from debt relief, except up to a certain amount determined by Government Regulation, are subject to income tax.
In its implementing regulation, it is stipulated that debt relief can be given to small debtors with a maximum credit of 350 million rupiahs. This provision is regulated in Government Regulation Number 130 of 2000 concerning Exemptions from Tax Object on Gains from Debt Relief of Small Debtors, which states that income received by the debtor in the form of gains from debt relief, which is a Small Debtor Debt from banks or financing institutions as referred to in Article 1, is exempted as a Tax Object.
Value Added Tax Aspects
Besides Income Tax, there are also Value Added Tax (VAT) aspects in the liquidation process. This is because the liquidation process involves the sale of assets, including inventory and fixed assets, which were originally not intended for sale.
VAT is applicable to the sale of Taxable Goods (BKP) in the form of inventory or assets that were originally not intended for sale but remain at the time of company dissolution. This is regulated in Article 1A paragraph (1) letter e of the VAT Law, which includes in the definition of the delivery of Taxable Goods, taxable goods in the form of inventory and/or assets that were originally not intended for sale but remain at the time of company dissolution.
According to the explanation of this article, the sale of BKP in the form of inventory or assets not originally intended for sale is treated as a self-use transaction, and therefore, VAT is applicable.
Tax Collection Aspects
In the liquidation process, there may still be tax debts unpaid by the corporate taxpayers. The state has the right of priority on the property of the taxpayer, which will be auctioned in public. As a result, payment to other creditors will be settled after the tax debts are paid.
This provision is regulated in Article 21 of the General Tax Provisions Law, which stipulates that the State has the right of priority for tax debts on the property of the taxpayer. Furthermore, Article 21 of the General Tax Provisions Law also stipulates that the right of priority includes the principal tax, administrative sanctions in the form of interest, fines, increases, and tax collection costs.
These are the taxation aspects of the liquidation process of a corporation. In business activities, there are many other processes such as mergers, consolidations, and acquisitions, which also involve taxation aspects. Stay tuned for the next article!
Related Provisions
- Law Number 6 of 1983 concerning General Provisions and Tax Procedures, as amended by Law Number 7 of 2021 concerning Harmonization of Tax Regulations.
- Law Number 7 of 1983 concerning Income Tax, as amended by Law Number 7 of 2021 concerning Harmonization of Tax Regulations.
- Law Number 8 of 1983 concerning Value Added Tax, as amended by Law Number 7 of 2021 concerning Harmonization of Tax Regulations.
- Law Number 40 of 2007 concerning Limited Liability Companies.
- Government Regulation Number 130 of 2000 concerning Exemptions from Tax Object on Gains from Debt Relief of Small Debtors.
