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Emerging from Mergers

By: Atty. Lew Earvin H. Manarin on July 4, 2024

Mergers play a crucial role in the corporate landscape. Mergers help companies compete better, keep up with new technology, and handle economic changes more effectively. Overall, mergers can be essential catalysts for growth and staying competitive in a fast-changing market.

In a merger transaction, one of the combining corporations survives and continues the combined business, while the others are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation. The effectivity date of the merger is crucial for determining when the merged or absorbed corporation ceases to exist; and when its rights, privileges, properties as well as liabilities pass on to the surviving corporation.

When exactly is the effectivity date of a merger? In the case of PMFTC Inc. v. CIR (PMFTC Case), the Court of Tax Appeals (CTA) had the occasion to address this question in resolving the issue as to when the surviving company in a merger can use the unutilized input value added tax (VAT) of the absorbed or constituent corporation. Making reference to Section 78 of the Revised Corporation Code, the CTA ruled that mergers shall be effective at the time the certificate approving the articles and plan of merger is issued by the Securities and Exchange Commission (SEC).  Thus, at that point of time, all rights, privileges, immunities, franchises, and other assets of the absorbed corporation, including any existing unutilized input VAT, are transferred to the surviving company without need of any act or deed.

In this case, the Commissioner of Internal Revenue (CIR) alleged that the surviving corporation cannot use the absorbed corporation’s unutilized input VAT until it shall have obtained from the Bureau of Internal Revenue (BIR) a tax clearance on the merger, as well as a tax clearance in the dissolution of the absorbed corporation.

The CTA, however, declared that there is no need to secure a prior tax clearance from the BIR before transferring the absorbed corporation’s unused input tax credits to the surviving corporation in cases of merger.  The CTA also held that, despite its dissolution, the absorbed corporation is not required to file for cancellation of registration with the BIR before the legal effects of a merger can take place under the relevant provisions of the Revised Corporation Code. It was clarified by the CTA that the BIR must not confuse the requirement for closure of a business and the legal effects of a statutory merger, which is mandated by law.

The ruling of the CTA in the PMFTC Case is actually consistent with prior rulings of the BIR which stated that any unused input tax from the absorbed corporation, which is deemed to have transferred all of its assets to the surviving entity, will automatically be transferred to the surviving corporation upon the effectivity of the merger. The surviving corporation can thus use the transferred input tax to offset against any of its output VAT liability.  Similarly, any remaining balance of minimum corporate income tax (MCIT), creditable withholding tax (CWT), and net operating loss carry-over (NOLCO) from the absorbed corporation will also carry over to the surviving corporation. (BIR Ruling [DA-(S40M-010) 315-08], [October 17, 2008])

The decision of the CTA in the PMFTC case is consistent with earlier decisions of the Supreme Court stating that although there is a dissolution of the absorbed or merged corporations, there is no winding up of their affairs or liquidation of their assets because the surviving corporation automatically acquires all their rights, privileges, and powers, as well as their liabilities. (Mindanao Savings and Loan Association, Inc. v. Willkom, 648 Phil. 505, 513 [2010]; Associated Bank v. Court of Appeals, 353 Phil. 702, 712 [1998].)

In any case, the CTA emphasized that even if a prior tax clearance is not a requisite for the transfer of assets of the absorbed corporation, the BIR is not prevented from conducting an investigation of the absorbed entity’s tax obligations or from issuing an assessment against the absorbed corporation as a result of its closure. Furthermore, in the case of a merger, the surviving corporation is not without risks since the outstanding obligations of the absorbed corporation, if any, shall also be transferred to the surviving corporation as provided under the RCC.

It may be noted though that in the PMFTC case, the date of issuance of the certificate approving the articles and plan of merger was the reckoning point of the effectivity of the merger.  In certain instances, the effective date of the merger may be the date agreed upon by the constituent corporations, as indicated in the Plan of Merger.  The SEC has held in several opinions that stipulating on an agreed upon date on the effectivity of the merger is allowed as long as the merger does not adversely affect any third party, nor would it cause a decrease in the tax due of the corporations involved.

Therefore, surviving corporations should not hesitate to fully utilize the assets and benefits of the constituent or absorbed corporations once a merger has been legally deemed effective. This will achieve the aim to maximize and leverage their combined strengths and achieve sustainable growth, as well as enable them to navigate market challenges effectively.

Lew Earvin H. Manarin is a CPA-Lawyer and an associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any questions or comments regarding this article, you may email the author at or visit MTF website at

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