DEFINITION of Clearance Certificate

A clearance certificate is a certificate that verifies that an entity paid all its tax liabilities at the time the entity ceases to exist or is transferred to a new owner. A clearance certificate is not required in all jurisdictions.

BREAKING DOWN Clearance Certificate

There are many different situations to 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.

Why Clearance Certificates Are Required 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 money lender 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.

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.

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. A business assistance tax clearance certificate in New Jersey is obtained from the state’s Division of Taxation.

The Internal Revenue Service may issue tax clearance certificates for entities that need to prove 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.