Treatment of liquidating

(The author is a director with Punongbayan & Araullo’s (P&A) Tax Advisory and Compliance Division.

P&A is a leading accounting, auditing and advisory services firm and is the Philippine member of Grant Thornton International Ltd.

• When there are creditors affected by the dissolution, a formal petition for dissolution shall be filed with the SEC, and notice and hearing will be duly conducted.

• Shortening of corporate term by the amendment of the articles of incorporation.

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 difference between the sum of the cash and the fair market value of property received and the stockholder’s cost of investment in the shares surrendered shall represent the capital gain or loss, as the case may be." The rationale for the above tax treatment, as adopted in numerous recent BIR rulings, is the precept laid down in the Supreme Court case of Wise & Co., Inc. However, said liquidating gain is subject not to the 5-10% capital gains tax but to ordinary income tax rates, depending on the status of the stockholder-recipient who can either be a corporation or an individual.

The transfer is not subject to DST since under the DST Regulations, "[A conveyance of real estate by a corporation without valuable consideration to an owner of all its capital stock in consequence of its dissolution is not subject to tax." Similarly, as the distribution of liquidating dividends to stockholders is without consideration and is treated as a return of capital and not made in the ordinary course of trade or business, the same is not subject to 12% VAT.

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.

It may take several years for such assets to be converted into cash.

Such assets may consist of securities that are illiquid or have certain restrictions or monies held in escrow where it will take several years for the conditions to be met for release of such funds.Download PDF When "Liquidating Trust" is mentioned, most people associate this with bankruptcy.


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