The Philippines, it’s often easier to incorporate a new entity than to dissolve an existing corporation. Investors face the tedious and long process of closing their businesses, which requires the cancellation of various registrations with regulators, including the Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR). The difficulties of dissolution — and eventual liquidation — are one of the factors that affected the country’s ranking in the World Bank’s ease of doing business report in recent years.
To address the challenges of corporations contemplating dissolving and eventually, liquidating, the SEC recently issued the guidelines on corporate dissolution consistent with the provisions of Republic Act 11232 or the Revised Corporation Code (RCC).
DIFFERENT TYPES OF CORPORATE DISSOLUTIONSEC Memorandum Circular No. 5, Series of 2022 prescribes the procedures and requirements for the different types of corporate dissolution, namely voluntary dissolution with or without creditors affected under Secs. 134 and 135 of the RCC, respectively; involuntary dissolution pursuant to Sec. 138; and dissolution by shortening of corporate term provided in Sec. 136.
Of the three types, dissolution by corporate life shortening is by far the most common, with a corporation determining at the outset the end of its existence. This is done through the filing of an application for amendment of the Articles of Incorporation (AoI) with the SEC indicating the shortened term or the last day that it operates as a juridical entity.
An entity can propose an expiration date of less than one year from the SEC approval or one year or more from such approval. The chosen timing also has a significant impact on the corporation. If the dissolution period is less than a year, the applicant has to submit, among others, a tax clearance certificate from the BIR. On the other hand, if the shortened term is a date that is more than one year from the Commission’s green light, the BIR tax clearance will not be required.
While the procedure and process are essentially the same for both options — with the same applications lodged with the same government agencies — the difference is in the sequencing.
Under the first option, the company will file and process the application for BIR tax clearance and undergo a rigorous tax audit process prior to filing an application for AoI amendment.
The second option allows for the filing and processing by the SEC of the application for shortening of the corporate term without waiting for the BIR tax clearance. After the SEC approves the application, the company continues to operate as a juridical entity until the expiration of the corporate term. The corporation is not yet dissolved until after the last day of its shortened term.
Until the release of SEC MC 5, these options were not officially provided in any SEC rulebook, although they were applied in practice. Numerous registered companies have taken advantage of the alternate route, effectively steering clear of the need to first secure the BIR tax clearance prior to the processing of the dissolution application. However, getting the clearance is still required for a corporation to officially close its business operations in the Philippines. In this regard, the BIR will still conduct the mandatory closure audit, which is a condition precedent to the grant of the tax clearance.
Under the old rules, the SEC may approve the dissolution provided the end of the corporate term must be at least one year from the filing of the application. In the recently promulgated issuance, it is clear that the end of the corporate existence must be at least one year from the actual approval of the SEC.
SEC MC 5 specifically provides that the application must contemplate a future date, and not a date that had already lapsed at the time of the filing of the application.
TIMELINE AND COSTSA regular BIR tax audit covering a fiscal or taxable year may take at least one year to close, or longer depending on the complexity of the issues raised by the examiners. In a mandatory closure investigation that will cover the last two to three taxable years, the audit may be completed in approximately two years.
Given that the completion of the BIR tax audit may be difficult to estimate, the timeline for the dissolution under option 1 is indefinite and will largely depend on the pace and workload of the assigned BIR examiners.
Meanwhile, the timeline under option 2 is definite as to when the corporation is deemed legally dissolved. Upon the expiration of the shortened term, as stated in the approved amended AoI, the corporation is considered dissolved for SEC purposes without any further proceedings. Thus, dissolution automatically takes effect on the day following the last day of the corporate term, without the need for the SEC to issue a certificate of dissolution.
The costs for both options are relatively the same, including the filing fees, regulatory fees, and deficiency taxes that may be assessed and paid at the close of the BIR tax audit. However, the simplified dissolution process will result in lower overall costs and time as there is no need to comply with certain requirements, such as filing of audited financial statements, which will save the corporation on professional fees. There will also be fewer personnel expected to be retained on the payroll, particularly those who will be in charge of the BIR tax audit and the related liquidation process. Likewise, the corporation is not required to maintain the office lease.
Under Sec. 139 of the RCC, a dissolved corporation will continue to exist for three years after the effective date of dissolution to generally wind up its affairs, including the disposal of its properties and distribution of its assets.
Notably, given the expected time lag between the SEC approval and the BIR tax clearance, corporations in the process of liquidation often opt to maintain a bank account for the settlement of any deficiency tax assessment by the BIR.
As the SEC has clarified the two available options in the shortening of the corporate term, registered entities have the opportunity to carefully weigh the method that will better address their needs, taking into consideration the processing period, available administrative resources, and the targeted timeline for the dissolution.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of EY or SGV & Co.
Cecille S. Visto is a tax senior director and lead manager for the Entity Compliance and Governance Services of SGV & Co.