Closing a Business Owned by a Corporation in the Philippines

Obtaining of Tax Clearance

Under Section 52 (C) of the NIRC of 1997, every corporation shall, within 30 days after the adoption of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including corporations which have been notified of possible involuntary dissolution by the SEC, or for its reorganization, file the necessary return with the BIR, setting forth the terms of such resolution or plan; and that prior to the issuance of the SEC of the certificate of dissolution or reorganization, such corporation must secure a certificate of tax clearance from the BIR to be submitted to the SEC.

Under Section 2 of BIR-SEC Regulations No. 1, whenever a corporation undergoes dissolution, whether voluntarily or involuntarily, then –

1.    A tax clearance must be obtained from the BIR, by filing the income tax returns covering the income earned by them from the beginning of the taxable year to the date of dissolution;

2.    The SEC shall furnish the BIR a copy of any order of involuntary dissolution or suspension of the primary franchise or certificate of registration of a corporation;

3.    The SEC shall issue the final order of dissolution only after a certificate of tax clearance has been submitted by the dissolving corporation.

However, in the case of involuntary dissolution, the SEC may proceed with the dissolution if 30 days after the receipt of the suspension order no tax clearance has yet been issued.

For the application for closure of business or cancellation of Taxpayer Identification Number (TIN), the following are the procedures:

A. Venue

Revenue District Office (RDO) where TIN is registered.

B. BIR Form

BIR FORM 1905 - Cancellation of Registration / Cancellation of TIN – 2 original copies (among others - Application for Registration Information Update for Updating / New Copy of TIN Card / New Copy of Certificate of Registration [COR])

C. Documentary Requirements

1.    Notice of closure or cessation of business;

2.    List of ending inventory of goods, supplies, including capital goods;

3.    Inventory of unused sales invoices/service invoices;

4.    Unused sales invoices/service invoices and all other unutilized accounting forms (e.g., vouchers, debit/credit memos, delivery receipts, purchase orders, etc.) shall be physically submitted to the RDO where the Head Office (HO) is registered or where the Authority to Print (ATP) was secured;

5.    All business notices and permits as well as the COR shall be surrendered for cancellation;

6.    Board Resolution indicating the purpose and the name of the authorized representative; or Secretary’s Certificate (1 original)

7.    Any government-issued ID of the authorized representative (1 photocopy)

8.    Other documents necessary to support the changes applied for.

Our guide for the foregoing is BIR RMC No. 57-2020 and its Annex A11.

D. Procedures

1. All taxpayers who filed for cancellation of registration due to closure/cessation or termination of business, except for branches, shall be subjected to immediate investigation by the BIR office concerned to determine the taxpayer’s tax liabilities.

2. For juridical persons, the TIN shall be cancelled at the time of the dissolution resulting to termination of their corporate existence through the eventual cancellation of their registration with the BIR.

3. The BIR district office of the HO of the dissolved entity shall inform all the other BIR district office, where the branches are registered, of the closure/cessation of the business.

4. To avoid generation of stop filer cases, the BIR district office, upon complete submission by the taxpayer of the requirements shall:

a.    “End date” the tax types of the taxpayer;

b.    Destroy/shred in the presence of the taxpayer or his authorized representative, the unutilized sales or service invoices and other accounting forms by cutting them crosswise and lengthwise at the middle thereof so that the same shall be divided into four (4), ensuring that the same will no longer be used as originally intended; and

c.    Return to the taxpayer the destroyed/shredded sales or service invoices and other accounting forms for burning and/or proper disposition.

The BIR distinct office shall issue a Tax Clearance to the taxpayer applying for cancellation of TIN within ten (10) days from termination of its investigations and/or full settlement of the taxpayer’s liabilities, if applicable.

Of course, we also have to close the business with the Local Government Unit (LGU) concerned.

Retirement of Business with the LGU

             In doing business, one needs to secure a business or mayor’s permit in the city where the business is located.  In the same vein, one must also retire his business with the city.  As such, the notice of closure and other documentary requirements will have to be submitted to the city that issued the business permit. We start with the Barangay.

Barangay Hall

a. Valid ID of the Company’s President.

b. Barangay Clearance

This is the most basic legal document you need to have in order to transact with other government agencies or departments. You can request this at the barangay where your business is located.

c. Letter of Request for Retirement/Closure of Business

This letter shall signify your intention to cancel your business registration with your barangay. The letter must indicate:

·         Date of application;

·         Contact details of the addressee (the Barangay Hall);

·         Name of the applicant;

·         Registered business name;

·         Date of registration with the government, in this case, the barangay;

·         Business permit number;

·         Reason/s for the closure of business;

·         Proposed date of closure; and

·        A declaration that the business has no outstanding obligation or liability with the barangay.

Then after Barangay, proceed with the City or Municipal Hall

a. Valid ID of the Company’s President.

b. Barangay Clearance

c. Barangay Certificate of Closure Indicating Date of Closure

This shall be proof that you already settled all existing liabilities and successfully closed your business at the barangay level.

d. Latest Business Permit

You must submit the original copy of the latest business permit available.

e. Affidavit of Closure, Board Resolution or Notice of Dissolution Indicating the Exact Date of Closure

NOTE: Affidavits are required to be notarized.  The Original Board Resolution or Corporate Secretary Certificate on the closure of business must indicate the exact date of closure.

f. BIR Form 2303 or BIR Certificate of Registration

The original copy must be presented while a photocopy must be submitted. This shall be proof that you registered with the BIR during the course of your business.

g. Latest ITR and Financial Statements

The latest income tax returns and financial statements (e.g. Balance Sheets, Income Statement, Statement of Cashflows, etc.) for the three (3) preceding years of the retirement date must be photocopied and submitted to the City Hall where your business is located.

h. Latest VAT or Other Percentage Tax Returns

The latest business taxes filed from the last payment of the business permit up to the date of closure must be photocopied and submitted to the City Hall where your business is located.

i. Books of Accounts

The City Hall where your business is located may request that you present your books of accounts to be examined by their staff.

j. If with branches, proof of business tax payment from the LGUs governing the branches

This shall be proof of your compliance with other LGUs.

Next thing to consider is the termination of employees.

Department of Labor and Employment (DOLE)

Necessarily, employees will have to be terminated.  Notice of closure and termination must be given to the employee and the DOLE at least thirty (30) days before the intended date of termination.  Furthermore, if the closure is not due to business losses, the corresponding separation pay must be paid to the employees. Failure to observe this process will open up the company for an illegal dismissal lawsuit.

In case of business closure, how much is the separation pay?

Under the Labor Code of the Philippines (Renumbered) ART. 298 substantially provides that – “The employer may also terminate the employment of any employee due to the closing or cessation of operation of the establishment.  In cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year”.         

Finally, Notice to the SSS, Philhealth, Pag-Ibig and other Government Agencies

It must be emphasized that the notices of closure must also be given to the Social Security System (SSS), Philippine Health Insurance Corporation (Philhealth), and the Home Development Mutual Fund (Pag-Ibig).

For SSS, the following are the Documentary Requirements:

•      Certificate of Filing of Articles of Dissolution/Cancellation of Registration issued by the SEC. In absence of this, any two of the following:

•      AFS and ITR showing non-operation/no earnings for the applicable period/s filed with the SEC or the BIR within the prescribed period;

•      Board Resolution approving the termination of business operation adopted within the prescribed period and duly acknowledged received by regulatory agencies (e.g. BIR, SEC, etc.)

•      SS Form R-3 showing the separation of its employee/s, duly received by the SSS within the first ten (10) days of the month after the applicable quarter;

•      Notification of business termination duly received by the SEC or the BIR within the prescribed period;

For Philhealth, you just have to submit Employer Data Amendment Form or ER3 as well as the Certificate of Dissolution issued by the SEC or Minutes of Meeting certified by the Corporate Secretary.

For Pag-Ibig, accomplished the Employer’s Data Form (EDF), and submit it with Pag-Ibig together with the Specimen Signature Form (SSF[HQP-PPF-003]), proof of business existence such as SSS Certification and Mayor’s Permit, SEC Certificate of Incorporation, Approved Articles of Incorporation and By-laws.

Failure to notify and/or secure clearances from these government agencies will result in the continued assessment of the company for its mandated contributions.  The SSS, Philhealth and Pag-Ibig will still consider the company as active and presume that the company is delinquent in its remittances.  Hence, the company might be surprised to still be assessed these contributions four years after its closure.

If your company has been granted a license by other government agencies such as the Philippine Export Zone Authority (PEZA), Board of Investments (BOI), Philippine Contractors Accreditation Board (PCAB), etc., notice of the closure must be furnished to these agencies.  Some agencies will require the submission of further documents in order to issue a clearance of closure.

The above post does not create a lawyer-client relationship between you and me. While I am a lawyer, I am not your lawyer. It is still best for you to engage the services of your lawyer to address your specific legal concerns, if there is any.

Also, the write ups stated above was written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

Thank you for dropping by. I hope we can spend time together here in my website during your coffee break.