Tax Articles

When a Corporation is Half Dead

By Atty. Irwin C. Nidea Jr.

Do you know that a corporation may be considered dead by the Securities and Exchange Commission (SEC) but not by the BIR?

The Supreme Court (SC) recently issued a Resolution that addresses this quandary. In a recent case (GR No. 230847), Company A merged with Company B, which became the surviving corporation. However, prior to the merger, Company A filed a claim for refund with the BIR. According to the CTA En Banc, Company A ceased to exist when its merger with Company B was approved by the SEC. The fact that it is Company A and not Company B, the surviving corporation, that filed the claim for refund is fatal to the claim since Company B no longer had legal personality to do so. Hence, no claim for refund can be considered filed, and no suit or proceeding can be maintained in any court for the recovery of the tax.

The SC disagreed with the CTA En Banc. In the same case, the SC said that a merger is the union of two or more existing corporations in which the surviving corporation absorbs the others arid continues the combined business. The Corporation Code provides that one of the effects of merger is the cessation of the separate existence of the constituent corporations. The merger dissolves the non-surviving corporations. Hence, upon approval by the SEC of the merger, Company A’s legal personality, was dissolved. However, according to the SC, the dissolution of Company A due to the merger may not be true as far as the Tax Code is concerned.

According to the SC, before the Corporation Code took effect in 1980, the law had taken steps to protect government revenue by ensuring that taxes are collected from companies planning to dissolve. This is by way of the tax clearance requirement. Retiring corporations were obliged to report the incomes they earned for the purpose of determining the amount of imposable tax. Once a corporation has completely paid of its tax liabilities, the BIR will issue a Certificate of Tax Clearance which confirms that the corporation no longer has any outstanding tax obligations to the government. The tax clearance is then submitted to the SEC as a requirement before the latter may issue a Certificate of Dissolution. The law clearly provides that corporations shall not be dissolved until cleared of any tax liability.

However, this may not be true in a merger because the corporation that is merged automatically cease to exist. Thus, the SC ruled that in cases of merger, like in this case, Company A is considered dissolved under the Corporation Code but not insofar as the Tax Code is concerned. Can a corporation then be considered both dissolved and not dissolved at the same time?

The answer is yes. According to the SC, the purpose of the tax clearance requirement under the Tax Code is to ensure that a corporation contemplating dissolution does not renege on its tax liabilities and thereby irreparably deprive the government of much needed revenues. Consequently, the Tax Code prevents the corporation from being dissolved without having been cleared by the BIR. The SC held that Company A is considered not dissolved prior to it obtaining a tax clearance, but only for tax purposes. Thus, Company B, which is the surviving corporation, can still claim for tax refund.

This SC ruling has the following jurisprudential implications. The general rule is that a company can only be considered dissolved when it has secured both a certificate of tax clearance and a certificate of dissolution. But in case of a merger, a company can be considered dissolved for SEC purposes. But it remains alive for tax purposes until a certificate of tax clearance is secured.

A corporation cannot kill itself and hope that its obligations will die with it. The government will find a way to collect, always.