Separation Pay Due to Dissolution of Company - Exempt from Taxes

November 12, 1993 BIR RULING NO. 437-93 SEPARATION PAY DUE TO DISSOLUTION OF COMPANY EXEMPT FROM TAXES 28 (b) (7) (B) 268-92 437-93 M.I.C. Music Center P.O. Box 468, Greenhills Metro Manila Attention: Sister Felisa Salac, MIC Treasurer This refers to your letter dated July 16, 1993 in effect requesting opinion as to whether the separation benefits of personnel and maintenance staff who have been separated as a result of the dissolution of the Center are subject to the withholding tax under existing tax laws and jurisprudence. It is represented that the MIC Music Center is a non-stock, non-profit corporation; that its Board of Trustees acting on the decision of the MIC Music Center Administrative Council resolved to discontinue the operation of its music center and approved the cessation of the M.I.C. Center's operation due to the following reasons, namely: that the activities of the Music Center is not in line with the mission thrust of the religious congregation known as the Missionary Sisters of the Immaculate Conception of the Philippines, which is primarily the evangelization of the non-Christians and tribal Filipinos; lack of qualified M.I.C. personnel to administer the music function of the Center, and the difficulty in meeting the financial resources and requirements to meet operation costs and to maintain standard of music instruction; that the present music venue will be turned over to the Immaculate Conception Academy, and that it is presently in the process of liquidating its corporate liabilities, among which is the payment of separation benefits due its personnel which is equivalent to one (1) month salary for every year of service. In reply thereto, please be informed that pursuant to Section 28(b)(7)(B) of the Tax Code, as amended, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness, or other physical disability or for any cause beyond the control of said official or employee is exempt from income tax regardless of age or length of service. The abovementioned law requires the presence of these two conditions in order that the employee benefits may be granted tax exemption: (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or for cause beyond the control of the said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since the separation of your employees due to the cessation of your operation for reasons stated above is beyond their control, any and all amounts received by them as a result thereof are exempt from all taxes and consequently from the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended by B.P. Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. Moreover, the commutation and payment of unused sick leave and vacation leave credits are likewise not subject to income tax and consequently to the withholding tax. (See Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 proc. Oct. 17, 1991.) It is however, understood that this exemption does not include the payment of your employees' salaries. aisadc This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue