Entity Liquidation in Brazil
A two-phase liquidation of a dormant Brazilian subsidiary with complex inventory and tax compliance issues, requiring engagement of local counsel and regulators.
Situation
A subsidiary of an acquired company was a buy-sell entity in Brazil. An importer of record was used to receive goods for sale in Brazil and maintain inventory. Sales activity had ceased approximately two years prior, leaving the entity dormant with inventory and other items on its balance sheet, as well as physical inventory at the importer of record. Brazil has very strict tax laws around inventory tracking and disposal, making the inventory cleanup a complex undertaking.
Approach
Kestrel Partners assigned a project manager to manage resolution of all tax issues relating to the inventory, oversee the balance sheet cleanup, and manage the entire liquidation. The KP project manager evaluated and engaged tax and legal counsel and the liquidator. Internal team included representatives from Tax (direct and indirect), Legal, Accounting (Payroll, Business Unit, AP, Fixed Assets, and Consolidations), Treasury, IT, and Record Retention.
Key Objective
Minimizing all tax risks relating to the inventory while executing a fast, orderly liquidation.
Phase 1: Preparation for Liquidation
Finance / Accounting
- Complete physical inventory at Importer of Record and reconcile with accounting ledger
- Close out commercial cases with creditors and obtain 'Good Standing' certificate
- Engage tax and regulatory consultant
- Write off assets and inventory consistent with comprehensive tax resolution plan
- Reconcile local statutory books with US GAAP books
- Freeze P&L and write off all assets and liabilities
Tax
- Resolve pending tax disputes with Brazilian IRS
- Develop and execute comprehensive tax resolution plan
- Determine tax-efficient funding mechanism for back taxes and penalties
- Review and sign off on final tax returns
Treasury
- Provide funding to Brazil legal entity for ongoing costs and payments under the tax resolution plan
Phase 2: Entity Liquidation
Legal
- Adopt a plan of liquidation
- Hold general shareholder meeting to approve asset list and balance sheet
- Publish notification of dissolution in local newspaper
Tax
- Obtain valuation report of assets and liabilities
- Terminate inter-company agreement
Finance / Accounting
- Evaluate and engage liquidator
- Prepare liquidation report
- Surrender import/export license
Record Retention
- Transfer records to third-party firm
- Ensure plan meets local requirements and corporate policy