Corporate reorganization in Ukraine: consolidations and liquidation

Foreword

The global financial crisis and the COVID-19 pandemic are impacting businesses all over the world so badly that many operations have stopped, exports have fallen and imports are being replaced by domestic consumption, and international corporations had to put on hold any expansion plans and their forays into other markets.

In such an unprecedented situation, businesses have to either shut down or use their accumulated  financial resources and find ways to stay afloat.

Companies are rapidly pushed to operate in new ways. One of the recent good examples, luckily not related to the coronavirus, was Unilever’s decision to reorganize its corporate structure and move toward a single HQ in Rotterdam in order to increase control and make faster decisions about its global product portfolio.

It is obvious that experienced top-managers clearly understand weak spots of their businesses and know how to cope with such issues, including when corporate reorganization may be applied. In any case, one should think of corporate reorganization in terms of:

•  financial recovery of the business (e.g. tax optimization, reduction of costs, etc.);
• the need to establish correct and transparent corporate structure in project finance transactions or when attracting investors;
• acquisition of competing companies;
• business expansion or reduction;
• allocation and liquidation of non-core or non-profitable business lines;
• concentration of assets or property rights in one hand, etc.

Apart from the reasons for reorganization, caused mostly by the financial crisis, some of them are also driven by the developments in Ukrainian legislation, requiring business owners and top managers to rethink their corporate structures.

Let’s recall that draft law No. 1210 as of 08/30/2019 on changes to tax legislation was adopted early in 2020 and is now waiting to be signed by the President of Ukraine. After entering into force, the law will introduce so called “controlled foreign corporation” rules. Generally, beneficiaries will be liable for paying personal income tax in Ukraine on the amounts of the non-distributed company’s profit.

Another recent legislative novelty was introduced by the new version of AML Law as of 12/06/2019, which established new rules for the disclosure of beneficial owners of a company, requiring all legal entities to annually update the information about their corporate structure and beneficial owners, including filing a notarized copy of the beneficial owner’s passport and legalized (apostilled) certificates about foreign companies registration (if foreign companies are in the corporate structure of the reporting Ukrainian company).

Generally, forms of corporate reorganisation in Ukraine are divisions, separations, mergers, consolidations, transformations and liquidations. From our point of view, two quite efficient forms of corporate reorganization in the current realities of Ukraine are consolidations and liquidations.

Consolidation

Consolidation means the termination of one company and the transfer of its assets and liabilities to another company (successor).

Consolidations are mainly used if there is a necessity to enlarge business. For example, valuable assets, trademarks, licenses, etc. belong to different companies of the group and when there is no commercial point to maintain all the companies, they may be consolidated in one main company which will gain all these assets and property rights as well as liabilities to counterparties of companies participating in the consolidation.

Another example is when one of the group companies is profitable and the other one is unprofitable. Having one owner, it basically means that taxes are paid from one pocket and it may make commercial sense to cover the revenues by the losses to optimize the general group income.

Entering into consolidation, one should be aware of dozens of legal peculiarities that may arise in case of non-proper preparation for the process. Among the issues requiring special attention are correctly transferring assets and liabilities, tax implications, compliance with corporate and antitrust legislation, issues related to dismissals and transfers of employees, etc.

Liquidations

Liquidation of the joining company is an integral part of the consolidation procedure, and may also be considered as a separate measure for the financial recovery of the business.

Voluntary liquidation as an independent form of business reorganization is a way of terminating a company without succession, that is, without transferring its rights and obligations to other entities.

Obviously, liquidation is aimed at winding up those companies of the group that have only loss-making units or production that is not financially viable and has no prospects for recovery.

One must take into account that a voluntary liquidation process includes undergoing a tax inspection as well as settlements with the creditors. This stage of the liquidation procedure is definitely the most time- and resource-consuming. A preliminary internal tax audit is the prerequisite for a smooth tax inspection.

Now more than ever before, restructuring may become a magic bullet for international and domestic businesses seeking how to improve operations.

The article has been published at KyivPost website.