Introduction

In the Philippines, corporations are governed primarily by the Revised Corporation Code of the Philippines (Republic Act No. 11232), which outlines the processes for incorporation, operation, and dissolution. An inactive corporation, often referred to as a dormant or non-operational entity, is one that has ceased business activities but remains legally registered with the Securities and Exchange Commission (SEC). Closing such a corporation involves voluntary dissolution, a structured legal procedure aimed at winding up affairs, settling obligations, and ultimately revoking corporate existence.

This process is critical to avoid ongoing liabilities, such as annual report filings, penalties for non-compliance, and potential tax assessments. Key regulatory bodies include the SEC for corporate dissolution and the Bureau of Internal Revenue (BIR) for tax settlement. Failure to properly dissolve can result in perpetual corporate status, exposing directors, officers, and shareholders to personal liability. This article provides a comprehensive overview of the procedure, drawing from Philippine laws, regulations, and administrative issuances, including SEC Memorandum Circulars and BIR Revenue Regulations.

Legal Basis for Dissolution

Under Section 133 of the Revised Corporation Code, a corporation may be dissolved voluntarily when it is not in operation or upon expiration of its term. For inactive corporations, voluntary dissolution without judicial proceedings is applicable if the corporation has no debts or if debts can be settled amicably. If the corporation has commenced operations but later became inactive, it must follow the full dissolution process.

The Code distinguishes between:

Shortening of Corporate Term: Applicable if the corporation's term is amended to expire immediately (Section 36).
Voluntary Dissolution Where No Creditors Are Affected: For solvent corporations (Section 134).
Voluntary Dissolution Where Creditors Are Affected: Involves a more rigorous process with creditor notifications (Section 135).

Inactive corporations typically fall under the no-creditors-affected category if they have minimal or no outstanding obligations. Additionally, Republic Act No. 11232 simplified procedures for non-stock corporations and introduced expedited processes for certain cases.

Prerequisites for Closure

Before initiating dissolution, ensure the corporation meets these conditions:

Inactivity Confirmation: The corporation must not have conducted business for at least five years to qualify as "inactive" under SEC rules. An Affidavit of Non-Operation must be executed by the corporate secretary or a director.
No Pending Cases: No ongoing litigation, administrative proceedings, or claims against the corporation.
Settlement of Internal Affairs: All intra-corporate disputes resolved, and assets liquidated if any.
Compliance with Other Agencies: Clearances from local government units (LGUs) for business permits, if applicable, and from the Department of Labor and Employment (DOLE) if there were employees.
Tax Compliance: Full settlement of taxes is mandatory, as the BIR issues a Tax Clearance Certificate (TCC) required by the SEC.

Step-by-Step Procedure for Voluntary Dissolution

The dissolution process is administrative and filed with the SEC. It typically takes 3-6 months, depending on compliance and SEC workload.

Step 1: Board and Stockholders' Resolution

Convene a meeting of the Board of Directors to pass a resolution recommending dissolution. This must be approved by a majority of the board.
Subsequently, hold a stockholders' meeting where at least two-thirds (2/3) of the outstanding capital stock vote in favor of dissolution (Section 118 of the Revised Corporation Code).
For non-stock corporations, approval by a majority of trustees and members is required.
The resolution should include reasons for dissolution (e.g., inactivity), a plan for winding up, and appointment of a liquidator (often a director or officer).
Execute an Affidavit of Non-Operation if the corporation has been inactive.

Step 2: Preparation of Documents

Gather and prepare the following:

Verified Petition for Dissolution (SEC Form).
Board Resolution and Stockholders' Resolution, notarized.
Latest General Information Sheet (GIS) and Audited Financial Statements (AFS).
Certificate of No Pending Case from the SEC.
List of creditors and proof of settlement (if any).
Tax Clearance Certificate from the BIR (detailed below).
Clearance from other agencies (e.g., LGU Mayor's Permit cancellation, PhilHealth, SSS, Pag-IBIG if applicable).
For foreign-owned corporations, additional clearances from the Board of Investments (BOI) or Philippine Economic Zone Authority (PEZA) may be needed.

Step 3: Filing with the SEC

Submit the petition and supporting documents to the SEC Company Registration and Monitoring Department (CRMD).
Pay filing fees: Approximately PHP 2,000 to PHP 5,000, plus legal research fees (1% of filing fee).
If no creditors are affected, the SEC reviews for completeness. If approved, it issues a Certificate of Dissolution.
For cases with creditors, a more detailed verification is required, including publication of notice.

Step 4: Publication and Notification

Publish the Notice of Dissolution in a newspaper of general circulation once a week for three consecutive weeks (Section 134).
Notify known creditors in writing, allowing them 30 days to file claims.
If claims arise, the corporation must settle them before proceeding.

Step 5: Liquidation and Distribution of Assets

Appoint a liquidator to handle winding up (3-year period under Section 121).
Sell assets, pay debts, and distribute remaining assets to shareholders pro-rata.
File a Final Liquidation Report with the SEC upon completion.

Step 6: SEC Approval and Closure

Upon submission of all clearances and reports, the SEC issues the Certificate of Dissolution, effectively ending corporate existence.
The corporation's name is removed from the SEC registry.

Settling Taxes with the Bureau of Internal Revenue (BIR)

Tax settlement is intertwined with dissolution and must precede SEC approval. Under Revenue Regulations No. 11-2018 and related issuances, inactive corporations must obtain a TCC to confirm no outstanding tax liabilities.

Key Tax Obligations for Inactive Corporations

Annual Income Tax Returns (ITR): Even if inactive, file zero-income ITRs (BIR Form 1702) annually until dissolution.
Value-Added Tax (VAT) or Percentage Tax: If registered, file quarterly/monthly returns showing no transactions.
Withholding Taxes: Settle any withheld taxes on compensation, expanded withholding tax, etc.
Documentary Stamp Tax (DST): On dissolution documents and asset transfers.
Capital Gains Tax (CGT): If assets are distributed, CGT applies (6% on real property, 15% on shares).
Donor's Tax: If assets are distributed without consideration.
Penalties and Surcharges: Waived in some cases for inactive entities under BIR's compromise programs, but full payment is generally required.

Procedure for Tax Settlement

File Application for Tax Clearance: Submit BIR Form 1905 (Application for Registration Update) for cancellation of Taxpayer Identification Number (TIN) and registration.
Submit Supporting Documents:
- Board and Stockholders' Resolution for Dissolution.
- Inventory of Assets and Liabilities.
- Latest AFS and ITRs.
- Certificate of No Operation from SEC or Affidavit.
- Payment of any deficiency taxes assessed during audit.
BIR Audit: The BIR conducts a mandatory audit (Letter of Authority) to verify no unpaid taxes. This may take 1-3 months.
Payment of Taxes: Settle all assessed taxes, including:
- Final Income Tax on liquidation gains (corporate tax rate of 20-25% under CREATE Law, Republic Act No. 11534).
- VAT on asset sales if applicable.
- Administrative fees for clearance (PHP 500-1,000).
Issuance of TCC: Once cleared, the BIR issues the Tax Clearance Certificate, valid for dissolution purposes.
Cancellation of Registration: The BIR cancels the corporation's TIN and VAT registration.

Special Considerations for Tax Settlement

Amnesty Programs: If available (e.g., under Republic Act No. 11213, Tax Amnesty Act), inactive corporations can avail of amnesty for unpaid taxes, reducing penalties.
Deficiency Assessments: Common for unreported dormant fees or failure to file returns; negotiate compromises under Section 204 of the Tax Code.
Transfer Taxes: On asset distribution, ensure compliance to avoid hold-over on clearance.
EOPT Program: For long-inactive corporations, the BIR's Enhanced Opt-Out Program allows simplified closure with minimal audits.

Post-Dissolution Obligations

Retain corporate records for five years (Section 74 of the Tax Code).
Shareholders may face personal tax on distributed assets.
If the corporation had employees, ensure final payments and clearances from SSS, PhilHealth, and Pag-IBIG.
For listed corporations, additional delisting procedures with the Philippine Stock Exchange (PSE).

Potential Challenges and Remedies

Delays in BIR Audit: Expedite by ensuring complete submissions; appeal denials via BIR's protest mechanisms.
Unsettled Creditors: May require judicial dissolution under Sections 121-122.
Foreign Investments: Compliance with Anti-Dummy Law and Foreign Investments Act.
Penalties for Non-Compliance: SEC imposes fines up to PHP 1,000,000 for failure to dissolve properly; BIR adds surcharges (25%) and interest (12% per annum).

Conclusion

Closing an inactive corporation in the Philippines is a meticulous process requiring coordination between the SEC and BIR to ensure legal and fiscal closure. By following these steps, stakeholders can mitigate risks and achieve finality. Corporations are advised to consult legal and tax professionals for tailored guidance, as procedures may evolve with new regulations. Proper dissolution not only complies with the law but also protects personal assets and facilitates new ventures.