A Guide on Business Closure
Business closures occur for a variety of reasons, but regardless of the reason, it is critical to understand that you cannot simply cease operations.
This article explains the steps and requirements for filing a business closure (also known as a cessation of registration) with the BIRBusiness closures occur for a variety of reasons, but regardless of the reason, it is critical to understand that you cannot simply cease operations. It is your responsibility as a business owner or self-employed individual running a freelance business to perform the due diligence required to close the business properly. Let's look at what this means and what is required to do so.
What is the Closure of Business?
Closure of business or cessation of registration indicates that you wish to close your business and cease all tax filings with the BIR. It's also referred to as "retiring a business" at times.
This means you will no longer operate as a self-employed professional or freelancer, and you will no longer be required to pay taxes. It can happen for a variety of reasons. Most of the time, it's a financial issue, such as a loss or low profits. It essentially ends the legal existence of the business by informing a few key government agencies and local units and submitting all required documentation (and paying all applicable fees). In the Philippines, closing a business is a lengthy and laborious process. The requirements and processes differ depending on the type of company, city, and government agency.
Before you begin, keep in mind that the actual process may differ depending on the type of business classification you have.
In the case of a sole proprietorship:
The Department of Trade and Industry (DTI) must be notified of your decision to cancel if you are a freelancer, self-employed individual, freelance business owner, or similar group.
For corporations and partnerships:
The Securities and Exchange Commission (SEC) must be notified of any business, organization, or cooperative cancellation.
Steps for BIR Business Closure/Cancellation of TIN
Taxpayers who filed for cancellation of registration due to closure/cessation of business or termination of business shall be subjected to an immediate investigation by the BIR office concerned to determine the taxpayer's liabilities," according to the BIR.
Venue
Submit your application to the Revenue District Office (RDO) where your tax identification number (TIN) is registered.
BIR Form
For updating / cancellation of registration/cancellation of TIN / new copy of TIN card / new copy of the Certificate of Registration, use BIR Form 1905 - Application for Registration Information Update.
Documentary Requirements
Here's a list of the documents you'll need to start the process:
Notice of closure or cessation of business;
Notice of Death and Death Certificate, in case of death of an individual;
Estate Tax Return of the decedent, if applicable;
List of ending inventory of goods, and supplies, including capital goods;
Inventory of unused sales invoices/official receipts (SI/OR);
Unused sales invoices/official receipts and all other unutilized accounting forms (e.g., vouchers, debit/credit memos, delivery receipts, purchase orders, etc.) shall be physically submitted to the RDO where the Head Office is registered or where the Authority to Print (ATP) was secured;
All business notices and permits, as well as the COR, shall be surrendered for cancellation;
Other documents necessary to support the changes applied for.
Procedures
Death of Individual not subject to Estate Tax
If a decedent registered with the BIR has no properties subject to estate taxes, the heirs must complete BIR Form 1905 to request cancellation of the decedent's TIN.
The Death Certificate and Notice of Death must be submitted to the BIR district office where the decedent's TIN is registered.
The heirs must file an affidavit stating that the decedent had no properties subject to estate taxes.
The BIR district office must notify the heirs, administrator, or executor of the decedent's TIN of the status of the request within ten (10) days of the complete submission of the requirements.
Settlement of Estate Tax Liabilities
In the event of the death of an individual with properties subject to estate taxes who was previously registered in the ITS database, the BIR district office shall immediately modify and update the status of the decedent's TIN as "canceled" and proceed with the processing and issuance of the estate's TIN upon application by the executor or administrator.
If the decedent's TIN is registered in another BIR district office, the receiving BIR district office must notify the BIR district office concerned of the decedent's death by providing a copy of the decedent's Death Certificate. Such BIR district office shall then perform the update as stated in this section.
The new TIN shall be used in the filing of the estate tax return of the decedent, as well as in the filing of other applicable tax returns (e.g., Income, VAT/ Percentage Tax, etc.) if the estate is under the judicial settlement.
If the decedent was a business owner, in addition to submitting the Notice of Death and Death Certificate, the heirs/executor/administrator must file a short-term income tax return covering the period from January 1 until the date of death. The return must be filed within sixty (60) days of the date of death, unless the heirs/administrator/administrator request an extension of time to file the same, not to exceed six (6) months or April 15 of the following year. Once the decedent's business operations, including those covered by the short-term return, have been thoroughly investigated for tax purposes, the TIN will be canceled.
Decedents with a business registration will be subject to an immediate investigation by the BIR office responsible for determining the decedent's tax liabilities arising from his or her business. If the business is registered in a BIR district office other than the one where the Estate Tax Return is filed, the BIR district office that received the return must notify the BIR district office that received the return in writing, either by fax or email, for their corresponding action.
Within ten (10) days of the conclusion of its investigations and/or full settlement of the taxpayer's liabilities, such BIR district office shall issue a Tax Clearance for the decedent's business registration.
Dissolution, Merger, or Consolidation of Juridical Persons
Except for branches, all taxpayers who filed for cancellation of registration due to business closure/cessation or termination will be subject to an immediate investigation by the BIR office concerned to determine the taxpayer's tax liabilities.
For juridical persons, the TIN shall be canceled upon the dissolution, merger, or consolidation of their corporate existence, resulting in the eventual cancellation of their registration with the BIR. In the event of a business merger or consolidation, the TIN of the dissolved juridical persons must be marked with the "Ceased/Dissolved" status. If one of the parties survives, its TIN must be kept; however, if a new corporation is formed, a new TIN must be issued to that new legal entity.
The BIR district office of the dissolved entity shall notify all other BIR district offices where the branches are registered of the business's closure/cessation.
To avoid the generation of stop filer cases, the BIR district office, upon complete submission by the taxpayer of the requirements, shall:
- "End date" the taxpayer's tax types;
- In the presence of the taxpayer or his authorized representative, destroy/shred the unutilized SI/ORs and other accounting forms by cutting them crosswise and lengthwise in the middle, dividing them into four (4), ensuring that they will no longer be used as originally intended; and
- Return the destroyed/shredded SI/ORs and other accounting forms to the taxpayer for burning and/or proper disposal.
- Within ten (10) days of the conclusion of its investigations and/or full settlement of the taxpayer's liabilities, the BIR distinct office shall issue a Tax Clearance to the taxpayer applying for cancellation of TIN.
How long does it take to close a business?
In the Philippines, the entire process can take anywhere from a few months to a year or even longer, depending on the circumstances.If you have any outstanding issues (for example, missed BIR filings), expect it to take longer because the government must review and resolve them all before your business can be officially recognized as non-operational.
Penalties for failing to close a business include:
Criminal and civil penalties (tax audit issues)
Compromise penalties stemming from open cases
Fees and other penalties from the LGU
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Disclaimer: This article or blog is only for general knowledge and guidance and is not a substitute for an expert opinion. For technical advice, please consult your tax / legal advisor for your specific business concerns. For comments, suggestions, and feedback, feel free to email us at consult@upcloudaccounting.com
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Written by: Clarice Francesca Mae Lim, 2023, PUP Manila
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