Dissolution may either be voluntary or involuntary. There are three modes of voluntary dissolution, namely: There are several ways to dissolve a company, but by far the more widely used one is by shortening the corporate term under Section of the Corporation Code.
Some companies venture into dormancy prior to actual dissolution to wind down corporate affairs. It is helpful to distinguish dissolution from dormancy. Dissolution of a corporation denotes the permanent termination of its legal existence.
On the other hand, in dormancy, the corporation ceases its active operations but remains a going-concern for legal purposes. There is no change in the corporate term and all reportorial and administrative requirements shall subsist. The company will not be dissolved unless and until the proper applications are filed.
This gives the company flexibility on its decision whether to dissolve or maintain its legal existence should business pick up later on. Whichever mode to dissolve is adopted, once approvals and clearances of all concerned government agencies are secured and creditor claims are paid, the final step is to distribute the remaining corporate assets to the stockholders as liquidating dividends.
Past rulings by the Bureau of Internal Revenue BIR on the tax implications of liquidating dividends have been inconsistent. Collector of Internal Revenue 78 Phil. The Supreme Court explained that "xxx the amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits.
However, if the recipient, whether corporate or individual, is a resident of a country with whom the Philippines has a tax treaty, exemption from income tax can be availed of based on treaty provisions on disposition of shares, provided the treaty conditions are complied with and the appropriate tax treaty relief application is filed within the period and under the conditions prescribed by law.
The BIR rulings mentioned above also ruled on the issue of documentary stamp tax DST and value-added tax VAT in cases where the liquidating dividend consists of real property.
The transfer is not subject to DST since under the DST Regulations, "[A conveyance of real Liquidating dividends in limbo define by a corporation without valuable consideration to an owner of all its capital stock in consequence of its dissolution is not subject to tax. On the part of the liquidating corporation, it shall not be liable for income tax either on its transfer to the stockholders of the assets distributed in liquidation or for its receipt of the surrendered shares.
In addition, no DST shall be due on the surrender by the stockholders of their shares in the liquidating corporation and the subsequent cancellation thereof. The surrender of the said shares does not constitute a sale, assignment or transfer because the liquidating corporation is not taking title to the surrendered shares, and the shares are retired and not retained as treasury shares.
The tax treatment of liquidating dividends discussed above was supposed to definitively and finally put to rest the conflicting BIR pronouncements on the matter. However, any hope of legal stability was shattered when in a Dec. In the said ruling, confirmation from the BIR was sought on the following issues: Moreover, the ruling noted that the rulings previously cited in the request for confirmation are reversed and set aside.
There was no discussion to guide taxpayers on how to treat liquidating dividends. In so doing, the BIR put in limbo anew the tax treatment of liquidating dividends and added yet another legal thorn to an "Liquidating dividends in limbo define" complicated, time-consuming and costly dissolution process.
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