Clearance Certificate

What Is a Clearance Certificate?

A clearance certificate is a certificate that verifies an entity has paid all its tax liabilities at the time the entity ceased to exist or transferred to a new owner. It also applies to the tax liabilities of a deceased individual when managing their estate upon death. A clearance certificate is not required in all jurisdictions and is most common in Canada, the U.K., and Ireland. In the United States, clearance certificates are more commonly issued by state revenue agencies.  

Key Takeaways

  • A clearance certificate confirms that all tax liabilities of an individual or entity have been paid.
  • The certificate is applicable upon the sale of a business, transfer of ownership, or upon the death of an individual.
  • Different countries and different jurisdictions call for a clearance certificate depending upon the situation.

Understanding a Clearance Certificate

There are many different situations in which a clearance certificate may apply. A business may be required to obtain an income tax clearance certificate when it decides to dissolve. An estate whose assets have a high value may be required to obtain an estate tax clearance certificate when the estate owner dies and the estate's assets are distributed to heirs.

A sales tax clearance certificate allows someone purchasing an existing business to ensure that they will not be responsible for any unpaid sales taxes upon becoming the business's new owner. The validity of a clearance certificate may only last for a certain period of time. For example, clearance certificates in Australia are valid for 12 months from the date they are issued.

Clearance Certificates in Different Jurisdictions

Countries such as Canada, Australia, and Ireland use clearance certificates for such transactions as the purchase of real property or resolving estate assets after the death of the owner.

Ireland requires tax clearance certificates when businesses apply for or seek to renew a number of different licenses. Gaming licenses, liquor licenses, and moneylender licenses all require such certification in Ireland. Individuals who wish to hold certain public offices in Ireland must also obtain tax clearance certificates. This includes senior public officials and candidates for appointment to the judiciary.

In the United States, local governments can require clearance certificates for other reasons. For example, New Jersey requires businesses to obtain a tax clearance certificate in order to receive state grants, rebates, and other incentives. The certificate may be requested when business assistance or tax incentives are sought from such state agencies as the Economic Development Authority, the New Jersey Casino Reinvestment Development Authority, and the Department of Community Affairs.

The Internal Revenue Service may issue tax clearance certificates for entities that need to prove that they are current on their tax payments and not subject to any liens. Tax clearance certificates may be required by certain state or municipal government agencies when businesses want to compete for government contracts. Potential buyers of a business can require a clearance certificate before moving forward with the transaction.

In the United States, the Internal Revenue Service issues clearance certificates for federal income and other tax purposes, and clearance certificates can be requested by any individual or corporation looking for confirmation that their taxes are in order.