Separation of a company from an LLC in Ukraine

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A demerger involves establishing one or more limited liability companies (referred to as LLCs) and transferring to them a portion of the assets, rights, and obligations of the parent company based on a distribution balance.

In essence, a demerger represents a type of legal entity reorganization, but with a significant distinction: the LLC(s) being demerged continues its operations and isn't subject to liquidation.

Ukrainian legislation permits demerger from nearly any form of legal entity (as per Article 109 of the Civil Code of Ukraine). However, in this context, we'll specifically focus on the scenario of demerger from an LLC.

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When is this appropriate? Real-life cases.

The process of demerger can be strategically employed for tax optimization within an LLC or, for instance, when reorganizing a business. Not long ago, our company's experts successfully completed the demerger of a restaurant chain entity from its parent LLC.

The partners of the LLC were unable to reach an agreement on continued joint business operations and opted for a legal separation of the network. Through the demerger, a new company was established, to which the building and land plot of one of the restaurants were transferred to the balance sheet. This property now belongs to one of the partners.

As a result, each participant involved in the demerger realized their respective objectives: the business was divided, and the LLC-owner could continue their activities.

In this context, the demerger proved much more advantageous than reorganization (such as division), as it allowed the trading brand of the LLC owner's network to be preserved. In the case of reorganization, the LLC owner would have ceased to exist, which was categorically unacceptable to the participants of the demerger.

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Organizational Procedure for Demerger from LLC

In certain respects, it bears similarities to a reorganization process. The overall procedure is as follows:

  1. Decision-making during the general meeting of LLC participants regarding the demerger of the entity (entities).
  2. Notification of the LLC's creditors about the demerger. As per the prevailing legislation, a 30-day waiting period is required for a response from the creditors. If a response is received during this period, their claims must be addressed. The demerger cannot be completed without satisfying the creditors' claims of the LLC.
  3. Creation of a distribution balance sheet. This document outlines the assets, rights, and responsibilities that will be transferred to the newly established LLC. In this regard, the new LLC becomes the legal successor to the main LLC.
  4. Submission of necessary documents to the government registrar for registering the newly formed LLC resulting from the demerger. Simultaneously, a set of documents is submitted to implement modifications to the main LLC's charter (typically, these involve a reduction in the authorized capital of the main LLC).

The culmination of the demerger is reached at this juncture.

It's important to note that a demerger can be a complex and time-consuming process (lasting from 1 to 6 months), demanding skilled legal and accounting expertise.

Lack of effective guidance during a demerger can lead to challenges in establishing a new LLC, transferring real estate, and making errors in constructing a distribution balance.

Our team assists in navigating the demerger process from an LLC and offers the following services:

  • Creating a well-structured business strategy for the demerger.
  • Negotiating with existing creditors.
  • In accordance with accounting regulations, preparing a distribution balance.
  • Submitting necessary documents to the government registrar.
  • Facilitating the transition of real estate, land plots, and other assets requiring re-registration with governmental bodies due to the demerger.

Currently, our company's experts are ready to provide you with expert support in handling demergers of varying complexity.

Details regarding the cost of tax optimization services can be found here.

Feel free to get in touch with our specialists to tailor a personalized service package for your needs.

Publication date: 26/07/2023

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