Treatment of liquidating
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 already complicated, time-consuming and costly dissolution process.There are several ways to dissolve a company, but by far the more widely used one is by shortening the corporate term under Section 120 of the Corporation Code.Some companies venture into dormancy prior to actual dissolution to wind down corporate affairs.However, in Section 8 of BIR Revenue Regulation (RR) 06-08 dated April 22, 2008 (which consolidated all tax rules on the sale, exchange or other disposition of shares of stock held as capital assets), the tax authority definitively ruled that "xxx upon surrender by the stockholder of its shares in exchange for cash and/or property distributed by the corporation upon its dissolution and liquidation, the stockholder shall recognize either capital gain or loss. xxx [W]hen the corporation was dissolved and xxx its shareholders surrendered their stock to it and it paid the sums to them in exchange, a transaction took place, which was no different in its essence from a sale of the same stock to a third party who paid therefor." In effect, the liquidating gain, which is incurred if the fair market value of the properties given as liquidating dividend is higher than the investment cost of the shares, is treated as a gain from the sale or exchange of shares.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.If the recipient of the liquidating dividend is a corporation, whether domestic or foreign, the liquidating gain is subject to 30% ordinary income tax.
In the said 2011 ruling, confirmation from the BIR was sought on the following issues: â€¢ that the liquidating corporation is not liable for income tax either on its transfer of the properties to its stockholders as liquidating dividend or upon its receipt of the surrendered shares; â€¢ no DST is due on the surrender and cancellation of the shares surrendered by the stockholder; â€¢ no DST is due on the transfer of the properties from the liquidating corporation to its stockholders; and â€¢ the stockholder-recipient shall realize capital gain or loss from the transfer of properties by way of liquidating dividends.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.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.
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It is helpful to distinguish dissolution from dormancy.