A company that has not been trading for a full year of assessment is classified as dormant. The difficult question for the owner is whether to keep it dormant or to deregister or liquidate it.
There are advantages to keeping the company dormant, but there are also disadvantages, such as costs and burdensome administration. The decision hinges on the circumstances, says Jean-Louis Nel, tax director at Van Huyssteens Commercial Attorneys.
Keeping it dormant
A major reason for keeping the company dormant is if it holds assets even if it has stopped trading. It may be kept dormant if the intention is to resume trade in the future. The directors and shareholders may be reluctant to dispose of the assets soon after operations ceased.
Nel warns that selling the assets may have tax consequences. It would then be prudent to keep the assets than dispose of them only to acquire new ones at a later stage when trading resumes.
Another major reason for keeping the company dormant is to preserve the business name, the goodwill, and the brand for potential future use.
“Certain companies may also have a substantial assessed loss, which can be used to off-set future profits when the company commences with its business operations. This will effectively enable the company to reduce its tax liability.”
Nel points out that where a company with an assessed loss of R50 million is sold and the purchaser acquires a controlling interest, the transaction must be reported to the South African Revenue Service (Sars) because it will qualify as a “reportable arrangement”.
A company may stop trading because it is in financial distress, or for any other reason, such as the death of the owner or no succession plan in the case of a family business. It may then be better to formalise the dormancy if the odds of resumed trading activities are slim or non-existent.
“Once the company is regarded as dormant, it does not necessarily mean that the company is automatically precluded from complying with its statutory obligations under the Companies Act and the respective tax Acts,” Nel emphasises.
This obligation extends to the directors, representative taxpayers, and the public officers who have concomitant obligations under the Companies Act and the tax Acts in relation to the dormant company.
There will be ongoing costs associated with keeping the company registered, such as annual fees and accounting costs. A dormant company is still required to prepare annual financial statements, submit income tax and value-added tax returns to Sars, and file its annual returns to the Companies and Intellectual Property Commission (CIPC).
How to do it
An entity can formalise its dormancy by way of a liquidation process if there are still assets and creditors or by deregistering with the CIPC when there are no assets or outstanding creditors.
The deregistration route simply entails a letter to the CIPC on the original letter head of the company and signed by all the current directors. The letter should indicate that:
- the company is not carrying on business or is dormant; and
- the company has no assets, or because of the inadequacy of its assets, there is no reasonable probability of the company being liquidated.
The company must obtain a tax clearance certificate confirming its tax compliance or any other written confirmation from Sars that it is compliant and has no outstanding tax liability.
“Only after the final deregistration will the legal persona of the company cease to exist.”
The liquidation process entails an application to a High Court for provisional and final liquidation. A liquidator will take account of all the assets and liabilities and pay the creditors, of which Sars is a preferent creditor.
The company must inform Sars of the liquidation and deregister for the various tax types for which it was liable when it traded.
Coming back to life
Nel says it is possible to reinstate a deregistered company, particularly where the deregistration process was set in motion because of the failure to file and submit annual returns to the CIPC.
The Commission will require proof that the company was in business at the time of the deregistration, or it can require confirmation that immovable property is registered in the name of the deregistered company. It will also be reinstated if the company provides a court order directing that it must be reinstated.
“Where none of the above requirements can be met, the CIPC’s expressed view is that it will not reinstate the company. Deregistration puts an end to the existence of the company. Its corporate personality ends in the same way that a natural person ceases to exist on death,” says Nel.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning, legal or tax advice that is appropriate to every individual’s needs and circumstances.