In the volatile landscape of commerce, business owners may find it necessary to pause operations due to financial losses, rehabilitation, or strategic restructuring. In the Philippines, this is legally recognized as a bona fide suspension of operations. Unlike a permanent dissolution, a temporary closure allows a business to "freeze" its activities without fully extinguishing its legal existence.
However, "closing shop" is not as simple as locking the doors. To avoid hefty penalties, labor lawsuits, and tax complications, several legal requirements must be met.
1. Labor Law Requirements (DOLE)
Under Article 301 (formerly 286) of the Labor Code of the Philippines, an employer may suspend business operations for a period not exceeding six (6) months.
- The "Six-Month" Rule: The suspension must be temporary and bona fide. If the closure exceeds six months without the business resuming, the employees are technically considered terminated, and the employer may be liable for separation pay.
- Notice Requirement: While the Labor Code does not explicitly mandate a 30-day notice for temporary suspension (unlike permanent closure), jurisprudence and Department of Labor and Employment (DOLE) regulations strongly advise notifying both the DOLE Regional Office and the affected employees at least one month in advance.
- Status of Employees: During the suspension (up to 6 months), the employment relationship is "suspended," not severed. Employees are generally on "floating status" and are not entitled to wages, unless a Collective Bargaining Agreement (CBA) or company policy dictates otherwise.
2. Tax Compliance (BIR)
The Bureau of Internal Revenue (BIR) does not have a formal "temporary closure" status in the same way labor law does. From the BIR’s perspective, a business is either active or undergoing dissolution.
- Maintaining Compliance: Even if no revenue is generated, a taxpayer must continue to file "Nil" returns for all registered tax types (VAT, Percentage Tax, Income Tax, etc.). Failure to file these returns results in "open cases" and accumulating compromise penalties.
- Books of Accounts: The business must maintain its books and keep records intact during the period of suspension.
- Notification: It is prudent to submit a formal letter to your Revenue District Office (RDO) explaining the suspension of operations. This provides a paper trail if the BIR questions the sudden drop in tax filings.
3. Local Government Units (LGU) and Permits
Business permits are issued annually. If a business closes mid-year, it still holds a valid permit until December 31st.
- Mayor’s Permit: To avoid being assessed for local business taxes based on projected (but non-existent) sales the following year, the owner should notify the Business Permits and Licensing Office (BPLO).
- Retirement of Business: If the closure will span across a new calendar year, the owner may need to "retire" the business permit to stop the accrual of local taxes and fees, then re-apply when operations resume.
4. Mandatory Statutory Contributions
The employer’s obligation to remit contributions to SSS, PhilHealth, and Pag-IBIG is tied to the payment of wages.
- Reporting Form: Employers must submit an R-1A (Employment Report) or its equivalent to notify these agencies that employees are on leave without pay or that the company has temporarily ceased operations.
- Avoidance of Penalties: If the agencies are not notified, they will assume the employer is delinquent in remitting contributions for active employees.
5. Corporate Requirements (SEC)
For corporations and partnerships, the Securities and Exchange Commission (SEC) requires transparency regarding the company’s status.
- General Information Sheet (GIS): If the company is still legally existing, it must continue to file its annual GIS and Audited Financial Statements (AFS).
- Material Information: For publicly listed companies or those with public interest, a temporary closure is considered "material information" and must be disclosed via a current report (SEC Form 17-C).
Summary of Steps
| Agency | Action Required |
|---|---|
| DOLE | File a "Notice of Temporary Closure/Suspension" 30 days prior. |
| Employees | Issue formal notices regarding "floating status." |
| BIR | Continue filing "Nil" returns for all registered tax types. |
| LGU (City Hall) | Notify the BPLO to adjust or freeze local tax assessments. |
| SSS/PHIC/HDMF | Update membership status to reflect "no earnings/temporary separation." |
| SEC | Maintain annual filing of GIS and AFS to keep the corporation in "Good Standing." |
The Risk of Improper Closure
Failure to comply with these steps can lead to the "piercing of the corporate veil," where directors or owners may become personally liable for unpaid wages or taxes. Furthermore, an unannounced closure may be interpreted by the courts as illegal dismissal or constructive dismissal, entitling employees to full backwages and damages.