Withdrawal of a member from the Limited Liability Company (LLC)

07.11.2008

06.10.2008

24.09.2008

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1. Documentary evidence of the member’s withdrawal from the company.

In accordance with Clause 1, Article 148 of the Civil Code of Ukraine the member of the LLC can withdraw from the company on his (her) own initiative after providing a written notice to the LLC not later than 3 months before the withdrawal unless other term is specified in the Articles (Charter) of the company. The notice is executed in the form of the resolution by the member’s board if the company is a legal entity or by a certified by the notary deed if the member is an individual.

Involuntary withdrawal from the company might take place in the event when the member is systematically non-performing or improperly performing his(her) obligations or by doing certain actions precludes attaining of the objectives set by the company. In this case the rest of the shareholders may pass the resolution on excluding of such a member from the company (Art. 64 of the Law of

Ukraine

«On Business Companies»). The resolution is passed if it is voted for by the shareholders owning on aggregate more than 50% of the total voting rights in the company shareholders. At that, the member to be excluded cannot take part in the voting procedure.

In the case of death of a member his(her) share is transferred to the heirs. If other shareholder refuse such heirs of being admitted to the company then the respective share is repaid to the heirs under the same procedure as if the deceased member is withdrawing from the company.

If the member’s decision to withdraw from the company results in decreasing of the shareholding capital amount then it should be born in mind that the amount of the shareholding capital cannot be less than 100 established minimum monthly salaries based on the minimal rate for calculation of wages active at the moment of incorporation of the LLC (Art. 52 of the Law of Ukraine «On Business Companies»). Non-execution of this requirement may result in the forced liquidation of the company (Art. 144 of the Civil Code). Besides, decreasing of the amount of net assets of the company to the level less than the minimal amount of the shareholding capital is one of the reasons for liquidation of the company (Clause 4, Art. 144 of the Civil Code). This can be avoided by means of increasing of the shareholding capital at the expense of additional contributions made by the existing shareholders or by admitting new members into the company. Pursuant to Clause 6, Art. 144 of the Civil Code increasing of the shareholding capital is possible only after the company shareholders have made their contributions into the shareholding capital in full.

The books of accounting must reflect both decreasing of the shareholding capital by the amount of the share held by the member who withdrew and increasing of the shareholding capital by the amount of additional contributions made by shareholders pursuant to the minutes of the general meeting and under the same procedure as at making of ordinary contributions to the shareholding capital.

In the case of decreasing of the shareholding capital Clause 5, Art. 144 of the Civil Code requires that the company has to notify its creditors. The notice can be announced via the mass media or sent directly to each of the creditors. The creditors will not be entitled to require early repayment from or performance of any other obligations by the company or compensation of losses by the company (Clause 5, Art. 144 of the Civil Code).

The resolution of withdrawal (or exclusion) of a member from the company is executed in the form of the minutes of the general meeting of shareholders. The withdrawal of a member from the company should be reflected in the reporting as of the date of government registration of the amendment entered into the constituent documents. Тhus, Clause 3, Art. 87 of the Civil Code sets out that the resolution of amending the amount of the shareholding capital becomes effective from the date of entering of the above amendments into the state register.

The withdrawal of a member from the company can be executed as:
1) «ordinary» withdrawal related to decreasing of the number of company shareholders or admission of a new member into the company;
2) the transtfer (sale) of the shared owned by the member to other shareholders or third persons.

The amount of reimbursement received for the corporate rights is accounted in a separate book for accounting of the operations with securities pursuant to Clause 7.6. of the Law of

Ukraine

«On Taxation of Profits of Enterprises» as the incomes from selling of the corporate rights. Ordinary gross incomes are not accrued in this case.

The expenses for purchasing of the above corporate rights comprise the amount of the contribution to the shareholding capital and the additional contribution, if any.

The date of the government registration of the articles (the statute, the charter) or the amendments thereto with respect of making additional contributions is considered the date for accrual of the expenses.

Pursuant to Part 3.2.1 of the Law of

Ukraine

«On the Value-Added Tax» the operations related to selling of the corporate rights for cash are not subject to taxation.

If the member acquires property as the reimbursement for the share in the shareholding capital then this operation is considered a barter deal. The member is entitled to reflect the gross expenses (or to increase the balance value or the relevant group of the capital assets) under the condition that the said property is used in the business activity of the member. Correspondingly, the amount of the VAT taxed upon the value of the above property is subject to inclusion into the composition of the tax loan. At that, the expenses cannot exceed the ordinary prices for the received property (Clause 7.1.1. of the Law of

Ukraine

«On Taxation of Profits of Enterprises»).

- The transferor member – individual:

The accounting is performed by such a member independently in accordance with the principles of accounting of financial liabilities from the operations with investment acts under the provisions of Clause 9.6. of the Law of

Ukraine

«On the Personal Income Tax». It means that the purchaser must not account the result of the said operation and if the outcome is positive it must not accrue and pay the tax.

An individual is independently determining the amount of incomes and expenses from the operations with securities, reflecting the financial outcome in the annual tax return and independently paying the respective personal income tax.

- The transferee member and the transferee third persons:

The costs of purchasing of the corporate rights are reflected in a separate book of accounting of the operations with securities according to Clause 7.6. of the Law of

Ukraine

«On Taxation of Profits of Enterprises». The expenses are equal to the value of the corporate rights.

If compensation of the value of the corporate rights is executed by means of transferring goods, capital assets items etc. this operation is reflected in the accounting as a sale, i.е. with occurrence of the gross incomes and accrual of the VAT-related tax liabilities. At that, the amount of VAT indicated in the tax return issued by the transferor member cannot be included into the amount of the tax loan granted to the transferee member because the value of the corporate rights is not directly reflected in its gross expenses.

2) if the share is repurchased by the company itself:At withdrawal of a member from the company the company is obliged to transfer to such a member the value of that part of the company property, which is proportional to the member’s share in the shareholding capital of the company (i. e. the respective cash equivalent). Under the agreement between the member and the company the repayment of the value of a part of the company property can be substituted by the transfer of the property in kind. If the contribution to the shareholding capital was executed by means of transferring the title for using the property, the relevant property is given back to the participant without payment of any reimbursement. The methods and the procedure of determining the value of the part of property proportional to the participant’s share in the shareholding capital as well as the procedure and the terms of its repayment are stipulated by the articles of association and the laws. (Art. 148 of the Civil Code).

- The transferor member – legal entity:

Thus, there exist the following distinctions from the «ordinary withdrawal» of the member:

The repayment must be executed after approval of the annual report for the year of the member’s withdrawal but not later than within 12 months from the day of withdrawal.

2. Taxation of the procedure of the member’s withdrawal from the company («ordinary withdrawal»).

Taxation of the procedure of the member’s withdrawal from the company is performed under the provisions regulating the taxation of operations with corporate rights. 1) Taxation of the company – issuer of the corporate rights.

Pursuant to Part 7.6.1 of the Law of Ukraine «On Taxation of Profits of Enterprises» the operation of repayment of the corporate rights with respect of withdrawal of the member from the company will not bear any fiscal consequences for the company. It means that neither income nor expenses are accrued in the specific fiscal accounting envisaged for the operations with securities.

If the repayment is performed in monetary funds (cash) then there is no need for the issuer to reflect the gross income and the liabilities in terms of the VAT because such an operation is not a sale. If repayment of the value of a part of the company property is transferred to the member in kind (by means of transferring the property) then this operations falls under the determination of the «sale». At that the VAT-related gross expenses and fiscal liabilities are accrued upon the issuer. The operation of repayment to the member of the capital assets previously contributed by the member to the shareholding capital is the only exclusion.

2)Taxation of the member withdrawing from the company

- if the member is a legal entity.

This member has to determine the balance expenses or the income from the operations with corporate rights on the basis of the principles of accounting of operations with securities and corporate rights as set out in Clause 7.6. of the Law of

Ukraine

«On Taxation of Profits of Enterprises». At that the incomes received by the member from the operations with corporate rights include the amount of the share in the property of the company received by the member and the composition of expenses reflects the amount of the member’s contribution into the shareholding capital.

In the case when the repayment of the share to the member is executed by means of transferring to the member of the property (inventory holdings) of the company it is necessary to execute the sale and purchase agreement. Afterwards, the company debt due to the member as the amount of repayment for its share and the debt of the member due to the company under the above sale and purchase agreement are set-off. In this case the member will be entitled for reflection of its gross expenses (depreciation) upon the costs of the inventory holdings (capital assets) as well as upon the tax loan for VAT.

- if the member is an individual.
This member has to be governed by Clause 9.6. of the Law of

Ukraine

«On the Personal Income Tax» and namely – to perform personally the accounting of operations with the investment assets. At that, while refunding the share to the member the issuer must not account the result of this operation and must not accrue the personal income tax. The individual member must reflect the financial outcome of such an operation in his(her) annual tax return and to pay the personal income tax independently. In this case the investment profit, upon which it is imposed the tax rate of 15%, is determined by means of decreasing of the amount of the share in the company property received by the member by the amount of the contribution made by the member to the shareholding capital of the company.

3. Taxation of the operation of transfer (sale) of the share in the shareholding capital

The operation of transfer (sale) of the share in the shareholding capital bears practically no consequences for the issuer. Only the name of the member is changed.

The documentary confirmation is performed using the following means:

- signing of the minutes of the meeting of shareholders with respect of their agreement for transfer of the member’s share to other members of the company (third person, the company);

- signing of the agreement for purchase and sale of the share in the shareholding capital.

The amount of reimbursement paid to the member who is the transferor of his(her) share constitutes the agreed price of selling of the corporate rights. The settlement date is set out in the agreement for purchase and sale of the share. - the company must not calculate the share of the member (to prepare a separate balance);
- the member receives the reimbursement right after the withdrawal without waiting for approval of the respective annual report.
- the amount of the shareholding capital remains unchanged (i.е. no need to diminish and then to increase the shareholding capital amount).

The members of the company have the pre-emption right for purchasing of the share of the member proportionally to the amounts of their shares unless the articles of association (the statute, the charter) or the agreement between the members stipulate otherwise. At that, the purchase is executed at the price and under the conditions similar to those when the share has been suggested for selling to third persons.

Tax accounting:
1) If the share is purchased by other members or third persons.
- For the LLC – no fiscal consequence.

Pursuant to Clause 4, Art. 147 of the Civil Code and Art. 53 of the Law of Ukraine «On Business Companies» the share held by the member in the shareholding capital can be repurchased by the company. In this case the company has to transfer this share to other members or to third persons within the term not exceeding one year. Within the said period distribution of profits as well as the voting and determining of the quorum in the higher governing body are performed without taking into consideration of the share repurchased by the company. If the company fails to transfer the share within a year it must decrease the amount of its shareholding capital.

According to Part 7.6.1 of the Law of

Ukraine

«On Taxation of Profits of Enterprises» this operation is not reflected in the tax accounting of the company. At the subsequent selling by the company of the corporate rights to other members or to third persons this operation cannot be regarded as the issue of the corporate rights any more. For this reason the company receives incomes in compliance with Clause 7.6. of the Law of

Ukraine

«On Taxation of Profits of Enterprises» amounting to the agreed value of the corporate rights. In this case at the moment of selling of the corporate rights the company will also be entitled to reflect its expenses born with respect of purchasing the rights from the member.

If the company fails to sell the corporate rights within a year then the shareholding capital is subject to decreasing. At that, neither incomes nor expenses are accounted by the company in separate books of accounting of operations with securities and with corporate rights.

4. Inheritance of the share.

In compliance with Clause 5, Art. 147 of the Civil Code and Art. 55 of the Law of

Ukraine

«On Business Companies»:
1) if the articles (statute, charter) of the LLC contains no special indication at the necessity of consents from other members for admitting of the heir to the LLC the corporate rights of the deceased member are transferred to the heir under the regulations of inheritance procedure with entering of the necessary amendments to the articles of association and their state registration. The procedure is done on the basis of obtaining of the Certificate of Inheritance.
2) if the heir itself refuses of entering into the LLC as a new member or the resolution of such a refusal is taken by the general meeting then the procedure of withdrawal from the company of such a ‘non-admitted’ member is initiated. The heir is repaid with the amount of the respective share of the LLC property as of the date of the death of the previous member with termination of the corporate rights and decreasing of the shareholding capital.

Tax consequences for the member acting as the heir:

Pursuant to Art 13 of the Law of Ukraine «On the Personal Income Tax» the heir must reflect the amount of the inherited by him(her) share in his(her) annual tax return and to independently pay the tax at the tax rate imposed by Clause 7.1. Regulation 889 (15%).

During the subsequent sale of this share the total amount of income within the composition of the financial result of operations with investment assets must be accounted as the increase of the annual taxable income of the individual heir with its reflection in the annual tax return without its compensation by expenses (Clause 9.6. Regulation 889). As the result of that there occurs the double taxation both at the stage of inheritance and at the stage of the sale.

5. Gratuitous transfer of a share between the individuals.

This operation is called the donation. This donation of corporate rights must be mandatory executed in the form of the written agreement (donation duty) (Art. 719 of the Civil Code of Ukraine).

At that, the individual member received the corporate rights as the donation must be governed by Art. 14, Art. 13 of the Law of

Ukraine

«On the Personal Income Tax» (taxation of donations under the rules of taxation of the inheritance).

Therefore, the amount of the share donated to the said individual is included into his(her) taxable income in the annual tax return and subject to payment of the tax at the rate of 15%.

During the subsequent sale of this share by such a member the investment asset donated to the taxpayer is considered as purchased at the zero value (para. 4 Clause 9.6.2 of the Law). Thus, while determining the financial outcome in the annual tax return the income from selling of the investment asset cannot be decreased by the expenses for its purchasing because the expenses amount to zero.

With respect of the member who donated his(her) share the investment loss resulted from such a donation is not accounted while determining the total financial outcome of the operations with the investment assets (para. 4, Part. 9.6.5, Clause 9.6, Art. 9 of the Law of Ukraine «On the Personal Income Tax»).

Marina Malina, Director of Legal Alliance

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