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This pandemic has brought many challenges to many companies. We are already seeing companies closing stores, some permanently. Others are undertaking corporate restructuring programs to expand their resources and maintain or improve their competitiveness.
Closing of business or undertaking restructuring activities may eventually result in dissolution or liquidation. When a corporation dissolves, the shareholders surrender their shares. In return, shareholders receive cash and / or property from the corporation if anything remains after the payments of third party obligations. The amount of cash and / or other property received by a shareholder after the dissolution or partial liquidation of a corporation is often called a liquidation dividend.
And let me point out that even in death there are taxes. So goes a familiar phrase: nothing can be certain except death and taxes. The death of a business entity, voluntary or not, does not exonerate it from the resulting taxes. What is not sure is what part of the process is taxable and what tax is applicable.
The tax treatment of the liquidation dividend by our tax authority, both by the shareholder and by the dissolving corporation, had been inconsistent, generating confusion among taxpayers. Let me then update the income tax consequences of the transfer of assets from the corporation in liquidation to its shareholders. The other tax implications, such as business tax, will be discussed in a later issue in this column.
On the part of the shareholder / owner: The description – dividend settlement – itself has added to the confusion. Although it is described as a dividend, it should not be treated as a dividend for tax purposes. Dividend tax will not apply.
Rather, as emphasized in several cases, this is no different from a sale of shares to a third party. Therefore, the gain or loss for the shareholder is also known as capital gain or loss. But it should also not be treated as a capital gain subject to capital gains tax. While the property receipt is similar to the receipt for the proceeds of the sale of shares that is generally subject to capital gains tax, this is not the case for the gain derived from receipts for assets of a dissolving corporation.
Instead, jurisprudence, as early as 1947, has characterized the gain or loss suffered by a shareholder of a dissolved corporation as a taxable income or a deductible loss. This characterization is already incorporated in the Tax Code. This Section 73 (A) of said Code establishes that when a corporation distributes all its assets in complete liquidation or dissolution, the realized gain or loss suffered by the shareholder, whether individual or corporate, is a taxable income or a deductible loss. , as the case may be. The same rule is established in the implementing regulations (Section 8, Revenue Regulations 6-2008), which allows the investor to recognize capital gain or capital loss upon delivery of shares calculated by comparing cash and value. fair market of the property received with the cost of the investment in shares. The difference between the sum of cash and the fair market value of the property received and the cost of the investment in shares will represent the capital gain or loss of the investment, as applicable. Please note that the capital gain is subject to the regular income tax rate by the recipient, shareholder. In case of loss, it will be deducted from the other income of the shareholder subject to the regular rate of income tax.
Clearly, the settlement of dividends is not taxed as dividends. Also, while the profit earned by the shareholder is the same as, and is often described as, capital gain, the applicable tax is not capital gains tax. Instead, the gain is included in the shareholder’s income subject to the regular income tax rate.
By a corporation in liquidation: Tax treatment by the corporation in dissolution or liquidation is another cause of confusion, especially when it comes to the transfer of assets other than cash, such as real estate and shares of another corporation.
The tax office itself has issued contradictory pronouncements on this matter. In BIR Judgment 479-11, for example, the BIR denied a taxpayer’s request for tax exemption from the transfer of real property by a dissolved corporation to its shareholder or upon receipt of the shares delivered by the shareholder. In fact, that ruling reversed and annulled previous inconsistent rulings.
The Courts, however, have been consistent with the tax treatment of companies in dissolution or liquidation. In one case (CTA EB Case 1702 / CTA Case 8940) concerning the return of capital gains tax paid on the transfer of parcels of land by a dissolved corporation to its shareholder, the Court granted the same on the basis that the transfer is not subject to CGT. This is not due, as the Court explained, to the absence or absence of income from the sale, disposal or transfer of real estate, but rather because said transaction is subject to ordinary income tax by the individual or corporate shareholder. income tax for corporate shareholders.
Whatever the reason, it is clear that a corporation cannot be required to pay income tax (regular income tax or special / final tax rates) by reason of the transfer of assets (whether in cash or other forms property) to its shareholder due to dissolution or liquidation.
In summary, for income tax purposes, only the shareholder can be subject to regular income tax, if there is a gain in receiving assets from a corporation as a result of a total or partial dissolution or liquidation. Income tax will not be imposed on the company in liquidation, due to the transfer or receipt of the delivered shares.
The author is the managing partner of Du-Baladad and Associates Law Offices (BDB Law), a member firm of WTS Global.
The article is for general information only and is not intended, nor should it be construed as a substitute for tax, legal or financial advice on any specific matter. Therefore, the applicability of this article to any real or particular tax or legal matter must be supported by professional study or advice. If you have any comments or questions about the article, you can email the author at [email protected] or call 8403-2001 loc 310.
