A liquidating dividend is

26 Dec

Dissolution of a corporation denotes the permanent termination of its legal existence.

On the other hand, in dormancy, the corporation ceases its active operations but remains a going-concern for legal purposes.

a liquidating dividend is-83a liquidating dividend is-71a liquidating dividend is-35

However, in Section 8 of BIR Revenue Regulation (RR) 06-08 dated April 22, 2008 (which consolidated all tax rules on the sale, exchange or other disposition of shares of stock held as capital assets), the tax authority definitively ruled that "xxx upon surrender by the stockholder of its shares in exchange for cash and/or property distributed by the corporation upon its dissolution and liquidation, the stockholder shall recognize either capital gain or loss. xxx [W]hen the corporation was dissolved and xxx its shareholders surrendered their stock to it and it paid the sums to them in exchange, a transaction took place, which was no different in its essence from a sale of the same stock to a third party who paid therefor." In effect, the liquidating gain, which is incurred if the fair market value of the properties given as liquidating dividend is higher than the investment cost of the shares, is treated as a gain from the sale or exchange of shares.• Shortening of corporate term by the amendment of the articles of incorporation.There are several ways to dissolve a company, but by far the more widely used one is by shortening the corporate term under Section 120 of the Corporation Code.Some companies venture into dormancy prior to actual dissolution to wind down corporate affairs.It is helpful to distinguish dissolution from dormancy.Broadly distributions on a winding up will be taxable as income if within two years the individual (or someone connected with them) carries on a similar trade or activity.Dissolution may either be voluntary or involuntary.If the recipient is an individual, the tax will be the zero percent to 32% scheduler rates or, in the case of a non-resident alien not engaged in business in the Philippines, 25%.However, if the recipient, whether corporate or individual, is a resident of a country with whom the Philippines has a tax treaty, exemption from income tax can be availed of based on treaty provisions on disposition of shares, provided the treaty conditions are complied with and the appropriate tax treaty relief application is filed within the period and under the conditions prescribed by law.The BIR rulings mentioned above also ruled on the issue of documentary stamp tax (DST) and value-added tax (VAT) in cases where the liquidating dividend consists of real property.The transfer is not subject to DST since under the DST Regulations, "[A conveyance of real estate by a corporation without valuable consideration to an owner of all its capital stock in consequence of its dissolution is not subject to tax." Similarly, as the distribution of liquidating dividends to stockholders is without consideration and is treated as a return of capital and not made in the ordinary course of trade or business, the same is not subject to 12% VAT.