SEC OGC Opinion No. 23-14: Prohibition on the Retention of Surplus Profits

On 02 October 2023, the Securities and Exchange Commission (“SEC”) Office of the General Counsel (“OGC”) issued an opinion regarding the following issues, concerning the repeal of Section 29 of the National Internal Revenue Code (“NIRC”) under Section 8 of Republic Act No. 11534, or the Corporate Recovery and Tax Incentives for Enterprises Act (“CREATE”), which deleted the provision on the improperly accumulated earnings tax (“IAET”)

1. Whether or not the repeal of Section 29 of the NIRC has the effect of implied repeal of SEC Memorandum Circular (“MC”) No. 11, series of 2008 or the Guidelines for the Determination of Retained Earnings Available for Dividend Declaration; and
2. Whether or not the SEC still imposes fines and other penalties on corporations retaining surplus profits above 100% of their paid-in capital stock.

No express or implied repeal of SEC MC No. 11, Series of 2008

Section 4 of SEC MC No. 11, Series of 2008 prohibits the retention of profits by stock corporations over 100% of their paid-in capital stock, except:

1. When justified by definite corporate expansion projects or programs approved by the board of directors; or
2. When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its consent, and such consent has not yet been secured; or
3. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies.

The MC implements Section 43 of the old Corporation Code which is now Section 42 of the Revised Corporation Code (“RCC”). The SEC OGC opined that there was no express repeal of Section 42 of the RCC under the CREATE. Finally, the SEC OGC concluded that Section 42 of the RCC and Section 8 of the CREATE were not in irreconcilable conflict nor do they cover the same subject such that CREATE was intended as a substitute.

The imposition of the IAET is separate and distinct from the prohibition to retain profits under Section 42 of the RCC. The IAET is a penalty tax to discourage tax avoidance through corporate surplus accumulation while Section 42 of the RCC is a regulatory measure and violation of which is meted an administrative penalty.

Therefore, the rule remains, and stock corporations remain prohibited from retaining surplus profits above 100% of their paid-in capital stock except in certain cases enumerated under the law. 

SEC can impose fines and penalties for violation of the prohibition on the retention of surplus profits

Section 158 of the RCC states that if, after due notice and hearing, the SEC finds that any provision of the RCC, rules or regulations, or any of the SEC’s orders have been violated, the SEC may impose sanctions ranging from imposition of a fine to the dissolution of the corporation and forfeiture of its assets. 

Since Section 42 of the RCC and, by extension, SEC MC No. 11, Series of 2008 are not yet repealed, the SEC may still impose penalties for their violation subject to due notice and hearing.