How to perform a global entity rationalisation and strike off unnecessary entities

One effective way to help achieve these objectives is to strike off defunct, duplicate or otherwise unnecessary entities. This article summarises some of the most important aspects of reviewing a multinational organisation’s legal structure, determining if it has unnecessary entities, and striking off entities that don’t provide value.

Global entity rationalisation: Background

A global entity rationalisation, often called a legal entity rationalisation, is the process of reviewing a multinational organisation’s legal entities, that is, its complete tax structure. There is no bad time to conduct a rationalisation, but rationalisations are complex and time-consuming. Typically, they provide the most value after an organisation has grown significantly, either organically or through acquisition. For example, an organisation may acquire a company in a jurisdiction where it has an existing entity, and a single entity would be sufficient for both the newly acquired concern and the existing operation. Or, an organisation may have long ago established an entity to test a new market, and has not found success so no longer needs a registered company in that jurisdiction.

In short, the primary goal of a global entity rationalisation is to remove nonessential entities from an organisation’s structure, especially those that incur material outgoing costs but provide little to no value. We’ll now address some specific benefits that can result from conducting a rationalisation.

Some benefits of conducting a global entity rationalisation

An oganisation that conducts a global entity rationalisation can create a more efficient operating structure while lowering risk. By our estimate, a single entity can cost up to USD30,000 to USD50,000 per year to maintain, so eliminating unnecessary ones can result in significant organisational savings. Any entity, even one that has fallen dormant, carries compliance obligations, such as filing corporate and indirect tax returns. If these aren’t met, significant fines and penalties may result.

Here are some specific benefits a rationalisation can yield:

• Enhancing operational and cost efficiencies by consolidating or removing unnecessary entities
• Identifying and reducing compliance risks, including the risks of fines and penalties
• Increasing tax efficiencies, including minimising global tax leakage
• Eliminating the need for preparing and filing corporate reports, indirect tax reports and payments, and fulfilling other obligations for entities that are deemed unnecessary
• Reducing intra-group transactions, which leads to a decrease in transfer pricing obligations
• Preparing an organisation for audits and potential investors by providing evidence of an advanced, transparent and low-risk structure; this can increase an organisation's valuation and appeal to potential buyers
• Providing an opportunity to align an organisation’s legal entity structure with its current strategy, which may have shifted since the structure was initially established

Getting to strike offs: Reviewing your entities

Companies should approach global entity rationalisation systematically and typically with the help of third-party global tax advisors who can manage all aspects of the process. Obtaining a thorough understanding of an organisation’s entities — including how they function — is critical to making effective decisions about whether to keep an entity or strike it off. For example, an entity that appears to be dormant and serve no function may have been established to create tax efficiencies that could still be realised. In that case, the entity may not be necessary for operations, but it may be worth keeping.

The first step in a rationalisation is to create a chart of the current structure, including all legal entities, their types and locations, and their respective functions and operations. You should then determine if any efficiencies can be gained by eliminating or consolidating certain entities. Here are some questions to ask when determining if you should strike off an entity:

• Are there any ongoing business activities or transactions involving the entity and is it profitable?
• Does the entity provide any tax benefits?
• Does the entity have any employees on its payroll?
• Is there an opportunity to move the payroll to another entity or entities in the jurisdiction?
• Are the entity's accounts in good financial condition and compliant with local corporate and indirect tax rules?

After your assessment, it’s important to create a proposed optimised structure. You should understand how much it will cost to wind down and/or consolidate entities that have been deemed unnecessary and create both a budget for optimisation and projected cost savings over time.

One fact that is not as well known as it should be is how time-consuming and expensive compliantly deregistering and winding down an entity can be, depending on the jurisdiction, related activities and other factors. As a result, many companies will allow an entity to become dormant before striking it off. But even a dormant entity carries costs, administrative burdens and compliance risks, such as those associated with tax reporting. While a dormant entity carries different costs and obligations depending on the country of registration, dormancy is almost always a short-term or stopgap solution.

Finally, it’s important to note that while the terms “liquidation” and “strike off” are often used interchangeably, there is a difference between them. Liquidation typically involves selling assets to pay off creditors, whereas a strike off entails permanently shuttering a business. Both processes have pros and cons, but a liquidation often requires the appointment of third-party liquidator and is more laborious, time-consuming and expensive than a tax-efficient deregistration and strike-off process. In many situations, a strike off can be a cost-effective, straightforward and faster alternative to liquidation.

How to strike off entities: Tax efficient clean-up and deregistration

Requirements, costs and timelines for striking off an entity vary by country. Understanding the specific requirements of each jurisdiction in which you are considering striking off entities is essential to creating accurate budgets, timelines and predicted savings. Generally, you should plan on at least six months to wind down an entity, though in some countries it can take 12 months or more.

To provide some idea of the process, this section describes what’s typically involved when getting to the point of striking off an entity:

• Generating a “zeroed out” balance sheet (that is, one with no current or contingent assets and liabilities) and profit and loss statement, and having them certified by directors
• Ensuring that any employees paid through the entity are treated in accordance with local labour laws
• Cessation of trade
• Notifying affected parties, including but not limited to shareholders, employees and creditors
• Preparing and filing the entity’s final accounts and corporate tax return and settling all tax liabilities
• Informing the local tax authority of your intention to strike off the entity, and paying any related fees
• Seeking tax clearance from local authorities
• Obtaining shareholder signatures on a declaration form