1) Why this topic matters

When a business shuts down, it often still owns assets—inventory, equipment, vehicles, leasehold improvements, real property, or receivables. Many owners assume that once operations stop (and especially once the BIR registration is cancelled), selling those assets is automatically “outside VAT.” In Philippine VAT law, that assumption can be costly.

Two VAT ideas drive the analysis:

VAT can apply even when the business is no longer operating, because the law treats certain dispositions as part of (or incidental to) business activity; and
The law can tax the assets at the moment of closure through “deemed sale” rules—sometimes even before the assets are actually sold.

The correct VAT result depends on what assets are being sold, what the seller’s VAT registration status is at the time of sale, whether output VAT was already triggered upon closure, and whether special rules apply (e.g., real property, liquidation distributions, VAT-exempt assets).

2) Legal framework (Philippine context)

The main sources are:

National Internal Revenue Code (NIRC), as amended
- Section 105 – Persons liable; VAT on sale of goods/properties and services “in the course of trade or business”
- Section 106 – VAT on sale of goods or properties; includes “transactions deemed sale”
- Section 108 – VAT on sale of services and use/lease of properties
- Section 109 – VAT-exempt transactions
- Section 110 – Input tax crediting rules
- Section 111 – Transitional input tax (often relevant when registering; less so on closure)
- Section 112 – Refund/credit of input VAT for zero-rated or effectively zero-rated sales
- Section 113 – Invoicing requirements
- Section 114 – Filing/payment
- Section 236 – Registration, including updates/cancellation of registration
Implementing regulations (notably the VAT regulations and later amendments) that explain:
- how to compute VAT on deemed sale upon cessation,
- required invoicing (including “self-invoicing” in deemed sale situations),
- BIR registration cancellation mechanics and consequences.

Because VAT is intensely regulation-driven, in practice you must align NIRC provisions with the latest implementing revenue regulations and BIR issuances applicable to the year of closure/sale.

3) Core VAT concepts you must understand

A. “In the course of trade or business” is broader than “during normal operations”

VAT liability under Section 105 attaches to sales in the course of trade or business, a phrase that is not limited to ordinary day-to-day operations. The concept generally includes transactions incidental to or in furtherance of a business, and even transactions connected with winding down.

Practical consequence: Selling remaining business assets after closure can still be treated as sufficiently connected to the former business—especially where the seller is (or should still be treated as) a VAT taxpayer at the time of sale, or where the sale is part of liquidation/winding up.

B. VAT is a transaction tax that generally looks at the seller’s status and the nature of the transaction at the time it happens

If the seller is VAT-registered (or required to be VAT-registered) at the time of sale, VAT exposure increases.
If the seller is properly deregistered and no longer required to register, the analysis often shifts away from VAT—but other taxes may apply (e.g., income tax, withholding taxes, documentary stamp tax, local transfer taxes, and for real property possibly capital gains tax or expanded withholding tax, depending on classification and circumstances).

C. “Deemed sale” upon closure can create output VAT even without an actual buyer

This is the most important closure-specific VAT rule.

Under Section 106(B) (transactions deemed sale), certain events are treated as a taxable sale even though no external sale occurs. One key trigger is retirement from or cessation of business, which can cause a deemed sale of goods or properties on hand at the time of cessation (commonly including inventory and certain business assets, depending on how the rule applies to the property and how regulations define the base).

Practical consequence: A business can owe output VAT upon closure based on the value of remaining assets—even if it sells those assets months later, or never sells them at all.

4) What counts as “business assets” for VAT closure issues?

For VAT purposes, assets sold after closure typically fall into these categories:

Inventory/stock-in-trade (goods held for sale)
Supplies/materials used in business
Capital goods (machinery, equipment, furniture, computers)
Real property
- which can be classified as ordinary asset or capital asset for income tax purposes, but VAT has its own triggers (especially for VAT-registered sellers and “ordinary asset” real property transactions)
Intangibles (software, trademarks, goodwill) — may fall under “sale of services” or “sale/assignment of rights” depending on structure
Mixed or bundled transactions (e.g., sale of a branch, sale of an entire business, sale of assets with assumption of liabilities)

5) The big fork in the road: Was the seller VAT-registered (or still a VAT taxpayer) when the assets were sold?

Scenario 1: The seller is still VAT-registered when the assets are sold

If VAT registration was not cancelled yet, or cancellation is not yet effective, then sales of goods/properties that are not exempt are generally subject to 12% VAT under Section 106, unless a specific exemption applies.

This includes sales made during the “wind-down period,” even if regular operations have stopped.

Key compliance points:

Issue VAT invoices/receipts compliant with Section 113
Report the sale in VAT returns for the relevant period
Observe withholding rules if the buyer is a withholding agent (government buyers and certain situations may trigger withholding VAT mechanics)

Scenario 2: The seller has already been deregistered for VAT when the assets are sold

If VAT registration is properly cancelled and the seller is not required to register, the sale may be outside VAT—but you must test several risks:

Was output VAT already triggered by “deemed sale” upon cessation?
Is the seller actually still required to be VAT-registered?
- If the seller continues to make taxable sales above the VAT threshold (or otherwise falls under mandatory VAT registration rules), VAT may still be required.
Is the transaction one that the law/regulations still treat as VATable despite deregistration?
- In practice, this risk is highest when deregistration was not properly processed, was premature, or closure was not properly documented.

Important caution: Deregistration does not automatically erase VAT obligations tied to events that occurred while the business was VAT-registered (including “deemed sale” that should have been reported at cessation).

6) The “deemed sale on cessation” rule explained (and why it dominates this topic)

A. What is taxed?

On retirement/cessation of business, the law can treat certain goods or properties on hand as if sold at fair market value (or another valuation base provided by regulation), generating output VAT.

Commonly implicated:

remaining inventory
materials/supplies on hand
sometimes capital goods on hand (depending on regulatory treatment and whether input VAT was claimed)

B. When is it taxed?

At the time of retirement/cessation (i.e., the effective date of closure for VAT purposes). The business typically reports the deemed sale in the VAT return covering that period and pays output VAT.

C. Why the BIR uses deemed sale at closure

The VAT system allows the taxpayer to claim input VAT on purchases used in business. If the business shuts down while holding assets on which input VAT was claimed, the government prevents a “free pass” by imposing output VAT on those assets as the business exits the VAT system.

D. Invoicing/documentation

Deemed sale is usually implemented through a form of self-invoicing (as required by VAT invoicing rules and regulations) to document the deemed transaction and valuation.

E. How this affects later actual sales after closure

This is the practical question: If you already paid output VAT on deemed sale at closure, do you pay VAT again when you later sell the same asset?

Conceptually:

The VAT system should not tax the same value twice in a way that creates cascading VAT without credit mechanisms.
But the correct treatment depends on whether:
- the later sale is made while still VAT-registered,
- the later sale is treated as a separate taxable event,
- regulations allow (or require) treatment of the later sale as not subject because it is effectively a disposition of property already subjected to deemed sale VAT, and
- how the asset was treated in accounting/tax records after deemed sale (e.g., whether it is treated as “withdrawn” from business to owner, distributed, or retained for liquidation).

In practice, the cleanest approach is to align the closure treatment with the legal form of what happens to the assets at cessation, e.g.:

deemed sale followed by distribution to owners/stockholders in liquidation, or
deemed sale treated as withdrawal from business to the owner, or
continued holding for liquidation sales while still under a VAT-registered winding-up period.

If the seller remains VAT-registered until actual liquidation sales are done, then those sales are typically treated as VATable sales in the ordinary way (with no need to rely on deemed sale), and closure/deregistration should be timed accordingly. If the seller deregisters and later sells, the tax footprint often shifts to non-VAT taxes—but only if the closure and VAT exit were correctly completed.

7) VAT treatment by asset type after closure

A. Inventory / goods held for sale

Most likely VAT exposure.

If sold while VAT-registered → 12% VAT unless exempt.
If business ceased and you still had inventory on hand → likely deemed sale output VAT at cessation.
If deregistered and later sold → often argued as outside VAT if the seller is no longer engaged in business and not required to be VAT-registered, but exposure depends heavily on whether the cessation rules were satisfied and how the assets were treated at closure.

Common BIR audit issue: failure to declare and pay deemed sale VAT on closing inventory.

B. Capital goods (equipment, machinery, furniture)

Capital goods are not held for sale, but VAT issues arise because input VAT may have been claimed when acquired.

Possible VAT outcomes:

Sold while VAT-registered → 12% VAT on the sale (unless exempt)
If still on hand at cessation → may be captured by deemed sale rules depending on how regulations implement the cessation provision for capital goods and the taxpayer’s input VAT claims
If deregistered and later sold → often treated outside VAT if truly an isolated sale by a non-VAT person, but the safer analysis must account for:
- whether output VAT should have been triggered at cessation,
- whether the seller’s deregistration is effective and defensible, and
- whether the disposal is part of an ongoing taxable activity.

Special note on prior “input VAT amortization” rules for capital goods: Philippine VAT regulations historically had special handling for input VAT on capital goods over certain thresholds (e.g., amortization over time). Legislative and regulatory changes have modified this over the years. In closure scenarios, you must check which rule applied during the acquisition period and whether any “unutilized input VAT” adjustments are required upon cessation.

C. Real property

Real property can trigger either VAT or non-VAT taxes depending on multiple factors:

Was the seller VAT-registered and is the sale of real property subject to VAT (not exempt)?
- Sale of real property used in business or held primarily for sale/lease can be VATable if it is treated as an ordinary asset transaction and not exempt.
Is the sale exempt (e.g., certain residential thresholds, socialized housing, etc.)?
- Exemptions exist under Section 109, including exemptions based on property type and value thresholds for certain residential sales. These thresholds have been subject to indexation and amendments.
If not VATable, what replaces VAT?
- Often: capital gains tax (CGT) for capital assets, or regular income tax for ordinary assets, plus other transfer taxes and documentary stamp tax consequences.
Does “closure” change the classification?
- For income tax, classification as ordinary vs capital asset depends on the seller’s business and use/holding of the property. Closure complicates the facts: a property previously used in business may no longer be “used in business” after cessation, but that does not automatically convert it into a capital asset for all purposes. Documentation, timing, and the seller’s continuing activities matter.

High-risk area: selling real property after closure while assuming “no VAT” without confirming whether it is an ordinary asset sale that remains VATable (or whether VAT registration should have continued through liquidation).

D. Intangibles and assignment of rights

Sales/assignments of intangible rights may be treated as:

sale of services, or
sale/transfer of property rights.

VATability often depends on whether the transaction is in the course of trade or business and not exempt, and whether the seller is VAT-registered at the time.

In closure situations, these transfers are often part of liquidation (e.g., assignment of customer contracts, IP, software licenses). The VAT characterization can be technical and structure-dependent.

8) Liquidation and dissolution: VAT consequences beyond simple “asset sale”

If a corporation dissolves and distributes assets to shareholders, VAT issues can arise even without third-party buyers.

A. Distribution of assets to owners can itself be treated as a VATable event

Under the “deemed sale” framework and related principles, distribution or transfer of goods/properties to shareholders/owners (in liquidation or otherwise) may be treated similarly to a sale for VAT purposes when assets on which input VAT was claimed are taken out of the VAT system.

B. Sale by a liquidating corporation vs distribution-in-kind

Liquidation sale (corporation sells assets to outsiders and then distributes cash proceeds): more straightforward VAT on the sale if VAT-registered and the transaction is VATable.
Distribution-in-kind (corporation distributes assets to shareholders): may trigger deemed sale/output VAT depending on asset type and the regulations applied.

The form chosen affects not only VAT, but also income tax, withholding, and documentary stamp tax consequences.

9) VAT deregistration/cancellation and “final” VAT compliance

A. Cancellation of VAT registration is not automatic

Under Section 236, registration updates and cancellation require BIR processing and documentation (closure, inventory, books, invoices, etc.). In practice, cancellation can be delayed by:

open cases,
audit findings,
non-submission of required books/invoices,
unresolved VAT issues (including cessation/deemed sale).

B. Final VAT return and cessation reporting

A careful closure plan typically includes:

determining the effective cessation date,
preparing a detailed inventory of goods/properties on hand,
computing any deemed sale output VAT (as applicable),
filing the VAT return(s) covering cessation,
paying assessed output VAT and any penalties if late.

C. Invoicing at closure

Businesses should ensure compliance with invoicing rules for:

final sales,
deemed sale documentation (where required),
cancellation/surrender of unused invoices/receipts and related authority to print/issue, according to current invoicing rules.

10) Common audit triggers and mistakes

No deemed sale declared on closing inventory The BIR often checks closure filings against last reported inventory levels, purchases, and input VAT claims.
Deregistering for VAT too early If substantial liquidation sales continue, the BIR may question whether the taxpayer should have remained VAT-registered.
Treating post-closure sales as “purely private” without documentation If the assets were acquired/used in business and input VAT was claimed, the BIR expects a VAT exit mechanism (deemed sale or VATable liquidation sales).
Real property sold after closure without confirming VAT vs exemption vs CGT/EWT This can lead to incorrect tax base, wrong returns, and conflicting filings with the Register of Deeds/LGUs.
Mismatch between accounting treatment and tax treatment For example: writing off inventory in books but actually selling it later, with no VAT trail.

11) Practical structuring choices (and their VAT implications)

Businesses typically choose one of these approaches when exiting:

Approach A: Stay VAT-registered through liquidation sales, then deregister

Sell remaining assets while still VAT-registered and report/pay VAT in the normal way (for VATable assets).
Deregister after liquidation is complete.
Often administratively cleaner for VAT consistency, especially when many assets will be sold.

Approach B: Trigger deemed sale on cessation, deregister, then dispose as non-VAT (if defensible)

Report deemed sale output VAT at cessation for assets on hand (as required).
Deregister.
Later sell assets as an isolated non-VAT seller (subject to other taxes), if the facts support that the seller is no longer engaged in business and not required to register.

This approach can be viable but is documentation-heavy and must be executed carefully to avoid double-tax or reclassification disputes.

Approach C: Distribute assets to owners in liquidation (distribution-in-kind)

May trigger VAT via deemed sale concepts depending on asset type and input VAT history.
Later sale by the owner may be outside VAT if the owner is not engaged in business and not VAT-registered, but other taxes apply.

12) Illustrative examples

Example 1: Closing inventory (VAT-registered trader)

A VAT-registered trading company closes on June 30 with ₱2,000,000 of inventory (net of VAT) still on hand, and it had claimed input VAT on purchases.

If deemed sale applies: output VAT may be due at cessation based on the valuation base (often fair market value or prescribed base).
If the company instead remains VAT-registered and sells the inventory during July–September liquidation: the sales are reported as regular VATable sales and VAT is paid on actual selling price; deregistration happens after liquidation.

Example 2: Equipment sale after deregistration

A VAT-registered consultancy buys office equipment, claims input VAT, then ceases operations and deregisters. Six months later, it sells the equipment in a one-off sale.

Key questions:

Was output VAT on remaining properties properly addressed at cessation (deemed sale or proper VAT handling during the wind-down)?
Is the later sale truly isolated and outside “course of trade or business,” and is the seller not required to register?
If the seller remained VAT-registered at the time of sale, the equipment sale is generally VATable.

Example 3: Real property formerly used in business

A VAT-registered corporation closes its manufacturing business but retains a warehouse. Two years later, it sells the warehouse.

Key questions:

Is the warehouse treated as an ordinary asset sale that is VATable, or a capital asset subject to CGT (and not VAT)?
Was the corporation still VAT-registered at sale?
Does an exemption apply?

Real property sales require a separate, careful tax classification analysis beyond “business is closed.”

13) Key takeaways

Closure does not automatically remove VAT exposure on asset disposals.
The deemed sale on cessation rule can trigger output VAT even without an actual buyer and often becomes the central compliance issue.
Whether post-closure sales are VATable depends heavily on:
- VAT registration status at the time of sale,
- whether the seller is still required to be VAT-registered,
- whether the asset disposal is treated as incidental to business/liquidation,
- and whether the correct VAT exit mechanics were completed at cessation.
Real property and liquidation distributions are the highest-risk categories and frequently misunderstood.
Proper closure sequencing (inventory, deemed sale computation, final VAT filings, deregistration timing) is often more important than the eventual buyer-side deal mechanics.