Introduction

In the Philippine business landscape, companies may encounter periods of inactivity where no recent sales are generated, often due to economic downturns, market shifts, seasonal factors, or strategic pauses. Such entities, commonly referred to as dormant or inactive corporations, still bear significant financial obligations under Philippine law. These obligations stem from regulatory requirements aimed at ensuring transparency, accountability, and fiscal responsibility. Failure to address them can lead to penalties, legal sanctions, or even involuntary dissolution.

This article provides a comprehensive overview of the legal framework governing financial obligations for such companies, drawing from key statutes including the Revised Corporation Code of the Philippines (Republic Act No. 11232), the National Internal Revenue Code (NIRC) as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (RA 10963) and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act (RA 11534), Securities and Exchange Commission (SEC) regulations, and Bureau of Internal Revenue (BIR) issuances. It covers tax liabilities, reporting duties, compliance strategies, and potential relief measures, emphasizing proactive management to mitigate risks.

Legal Classification of Inactive Companies

Under Philippine law, a company with no recent sales is not automatically exempt from obligations. The SEC distinguishes between operational and non-operational (dormant) corporations. A dormant corporation is one that has ceased operations for at least five consecutive years, as defined in SEC Memorandum Circular No. 28, Series of 2020. However, even short-term inactivity triggers certain duties.

Dormant Status Declaration: Companies can voluntarily declare dormancy by filing a sworn affidavit with the SEC, stating the reasons for inactivity and affirming no outstanding debts to creditors (except those secured). This status suspends certain reporting requirements but does not eliminate all financial obligations.
Inactive but Not Dormant: For companies with temporary lulls in sales (e.g., less than five years), full compliance remains mandatory. The BIR classifies these as "inactive" if they file a notice of temporary cessation of operations via BIR Form 1905.

The distinction is crucial: dormant companies enjoy relaxed SEC filings, but tax obligations persist unless the entity is dissolved.

Tax Obligations

Even without sales, companies incur tax liabilities based on existence, assets, or prior activities. The CREATE Act, effective since 2021, reduced corporate income tax rates but maintained minimum thresholds.

Income Tax

Corporate Income Tax (CIT): Resident corporations are subject to a 20-25% CIT on taxable income (reduced from 30% pre-CREATE). With no sales, income might be zero, but the Minimum Corporate Income Tax (MCIT) applies at 1% (reduced from 2% under CREATE) of gross income if the company has been operating for over four years and normal CIT is lower. "Gross income" includes passive income like interest or rentals, even without sales.
Exemptions and Carry-Over: Net operating losses can be carried forward for up to five years (extended under CREATE for COVID-affected entities). Companies must file annual Income Tax Returns (ITR) via BIR Form 1702, even if reporting zero income, to avoid penalties.

Value-Added Tax (VAT) and Other Indirect Taxes

VAT: If registered as a VAT taxpayer, quarterly VAT returns (BIR Form 2550Q) must be filed, even with zero sales. Threshold for VAT registration is P3 million in gross sales/receipts annually; below this, companies may opt for Percentage Tax (3% on gross receipts).
Withholding Taxes: Obligations persist for payments like salaries (if employees remain), rentals, or professional fees. Failure to withhold and remit via BIR Forms 1601-C/E/F/Q can incur deficiencies.

Documentary Stamp Tax (DST) and Other Levies

DST applies to documents like loan agreements or stock issuances, regardless of sales activity.
Local Business Tax (LBT): Imposed by local government units (LGUs) based on gross receipts. With no sales, this may be minimal or zero, but annual declarations are required under the Local Government Code (RA 7160).

Filing and Payment Deadlines

Annual ITR: Due by April 15 (or 15th day of the fourth month post-fiscal year-end).
Quarterly Returns: VAT and withholding taxes due within 25 days after quarter-end.
Penalties: Surcharges (25-50%), interest (12% per annum under CREATE), and compromise fees apply for late filings. Criminal liability may arise for willful neglect.

Corporate Compliance and Reporting

The Revised Corporation Code mandates ongoing compliance to maintain good standing.

SEC Requirements

Annual Financial Statements (AFS): Must be audited (if assets exceed P600,000 or liabilities exceed P300,000) and filed within 120 days of fiscal year-end. Dormant companies may file unaudited AFS with a dormancy affidavit.
General Information Sheet (GIS): Annual submission within 30 days of anniversary date, detailing officers, stockholders, and capital structure. Non-filing leads to fines starting at P5,000, escalating to revocation of certificate of incorporation.
Beneficial Ownership Transparency: Under SEC MC No. 15-2019, companies must disclose beneficial owners annually, even if inactive.

BIR Registration Updates

Companies must update registration for inactivity via BIR Form 1905. Failure to do so may result in continued assessment as an active entity.

Labor and Employee-Related Obligations

If the company retains employees during inactivity:

Social Security System (SSS), PhilHealth, and Pag-IBIG Contributions: Monthly remittances required based on salaries, even if minimal. Suspension of operations allows temporary deferral, but notice must be filed.
Wage Payments: Under the Labor Code (PD 442), retrenchment or closure requires separation pay (one month's pay per year of service) and 30-day notice to DOLE.
13th Month Pay and Benefits: Pro-rated based on service period, mandatory if employees worked any part of the year.

For companies without employees, these obligations cease upon proper termination.

Debt Management and Creditor Obligations

Loans and Creditors: Inactivity does not discharge debts. Under the Civil Code (RA 386), obligations remain enforceable. Companies should negotiate restructuring or moratoriums.
Insolvency Proceedings: If unable to meet obligations, options include rehabilitation under the Financial Rehabilitation and Insolvency Act (FRIA, RA 10142) or voluntary liquidation.
Related-Party Transactions: Loans from affiliates must comply with transfer pricing rules under BIR Revenue Regulations No. 19-2020 to avoid tax adjustments.

Strategies for Managing Obligations

Cost Minimization

Voluntary Dormancy: Reduces SEC filings but requires annual confirmation affidavits.
Merger or Consolidation: Under the Revised Corporation Code, inactive companies can merge with active ones to consolidate obligations.
Capital Reduction: SEC approval needed to reduce authorized capital, potentially lowering DST on future issuances.

Relief Measures

Tax Amnesty and Incentives: The BIR offers periodic amnesties (e.g., under RA 11213, Tax Amnesty Act) for delinquent accounts. CREATE provides reduced rates and incentives for qualified enterprises.
Force Majeure Claims: In cases like pandemics, companies may invoke force majeure to defer obligations, subject to case-by-case assessment.
Dissolution: Voluntary dissolution requires SEC approval, BIR tax clearance, and settlement of all liabilities. Process involves publication of notice and liquidation of assets.

Risk Mitigation

Engage legal and accounting professionals for compliance audits.
Maintain records for at least five years (10 for tax purposes) to defend against audits.
Monitor updates from SEC and BIR, as regulations evolve (e.g., digital filing mandates under Ease of Doing Business Act, RA 11032).

Penalties and Enforcement

Non-compliance invites severe repercussions:

SEC Sanctions: Fines up to P1 million, suspension, or revocation.
BIR Penalties: Civil penalties up to 200% of tax due; criminal charges for evasion (imprisonment up to 10 years).
Judicial Actions: Creditors may file for involuntary insolvency or attachment of assets.

Enforcement is rigorous, with inter-agency coordination (e.g., SEC-BIR data sharing).

Conclusion

Handling financial obligations for companies with no recent sales in the Philippines demands vigilance to navigate the interplay of corporate, tax, and regulatory laws. While inactivity offers some respite, core duties persist to uphold public interest and fiscal integrity. Proactive compliance not only averts penalties but positions the company for seamless reactivation. Businesses should consult experts to tailor strategies, ensuring sustainability amid economic challenges. This framework underscores the Philippine commitment to a robust corporate ecosystem, balancing flexibility with accountability.