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What Is a Clearance Certificate?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 June 2014
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A clearance certificate is a document that is sometimes required as part of the paperwork when a company or various assets are purchased and transferred to the new owner. The text of the certificate confirms that the previous owner has settled all outstanding tax liabilities up to the date of the sale. In some countries, a clearance certificate is also required when a business is preparing to cease operations and liquidate all assets that are held in the name of the corporation.

The preparation of a clearance certificate is not required in all nations or local jurisdictions. Depending on the regulations currently in place regarding income tax, sales tax, estate tax, or property tax, the status of tax liability may be addressed in other documents required by local, state, or federal agencies. In some cases, the creation of the clearance certificate is more for the benefit of the new owner, and is often considered a legal and binding document that serves as a confirmation from the previous owner that no outstanding tax debt or lien is attached to the property being sold.

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In areas where a clearance certificate is required, it is common for real estate deals to include this type of document in the paperwork for the sale. Often, supporting documents such as official statements from tax authorities are attached to the certificate. This makes it possible for new owners to have conclusive proof that no tax burden is currently attached to the residential or commercial property involved in the purchase, and that the potential for unanticipated expenses associated with the purchase are not likely to materialize at a later date.

A sales tax clearance certificate may also be required when a company chooses to dissolve. In this setting, entities that purchase equipment, buildings, or other assets from the business are assured that they are not assuming any type of tax liability, and that the dissolving business does have clear title to the assets in question. This helps to eliminate any concerns about tax difficulties arising at a later date, which may be especially important to buyers residing in countries where any outstanding tax liability would automatically transfer from the previous owner to the new owner.

Should some amount of tax debt remain outstanding, the seller is usually required to settle that debt before the certificate can be issued. An alternative option would be for the buyer to settle the debt, paving the way for the clearance certificate to be issued. When this occurs, the amount of the tax settlement is often deducted from the purchase price of the property in question.

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