BIR Ruling

December 16, 1976 Messrs. Sycip Gorres, Velayo & Co. P. O. Box 589, Manila Attention: Mr . B . V . Abela Tax Division Gentlemen : This refers to your letter dated April 19, 1976 requesting a ruling as to the tax consequence of the contemplated transfer by your clients, Dr. Stephen Zuellig, Mr. Gilvert Zuellig and the following individuals: Thomas, Danniel, Christopher, Peter, Susan, David and Joan, all surnamed Zuellig of their stockholdings in the F.E. Zuellig (M) Inc. (FEZ) and the Pharma Industries, Inc. (Pharma) to the Zuellig Corporation (TZC) solely in exchange for TZC's shares of stock. It is represented that the Zuellig Corporation was incorporated in 1970 under the laws of the Philippines; that it was incorporated under the name of Zimcor Investment and Management Corporation; that its corporate name was changed in 1974 to "The Zuellig Corporation"; that it was primarily organized among other things to acquire by purchase, exchange assignment, gift or otherwise, and to hold, own and use for investment any or all kinds of properties of every kind and description and wherever situated including shares of stocks in other corporations; that as of March 31, 1975, the Zuellig Corporation has an authorized capital stock of P8 million divided into 800,000 shares with a par value of P10 each, of which 700,000 shares have been subscribed; that the stockholders of the Zuellig Corporation as of March 31, 1975 are the following: Stockholder No. of Shares Issued Additional Subscription 1. Dr. Stephen Zuellig 330,001 20,000 2. Mr. Gilbert Zuellig 329,996 20,000 3. Mr. Renato Magadia 1 4. Mr. Alberto Sevilla 1 5. Mr. Andres Gatmaitan 1 660,000 40,000 Total Subscribed 700,000 shares ====== that your clients have shares of stock registered in their name in the F.E. Zuellig (M) Inc. and/or Pharma Industries, Inc. all of said shares having a par value of ten pesos (P10.00) per share; that the aforesaid stockholdings of your clients will be transferred to the Zuellig Corporation at their par value which amounts to a total of P17,998,800.00; that the Zuellig Corporation will increase its authorized capital stock to cover the transfer (par) value of the stocks of the stockholder-transferors and will issue to the stockholder-transferors its shares of stock with a total par value of P17,998,800.00; that the Zuellig Corporation shares will be distributed as follows: a) Stephen Zuellig 659,957 shares b) Gilvert Zuellig 749,923 c) Thomas Zuellig 50,000 d) Danniel Zuellig 50,000 e) Christopher Zuellig 50,000 f) Peter Zuellig 90,000 g) Susan Zuellig 60,000 h) David Zuellig 45,000 i) Joan Zuellig 45,000 Total 1,799,880 shares and that the excess of the book value of the shares of stock transferred over the total par value of the Zuellig Corporation stocks issued in the amount of P9,725,079.96 shall be taken up in the books of the Zuellig Corporation as paid-in-surplus. In reply, I have the honor to inform you that pursuant to Section 35(c)(2)(c) of the Tax Code, as amended by Republic Act No. 4522, no gain or loss shall be recognized if a person exchanges his property for stocks in a corporation and as a result of such exchange, said person, alone or together with others, not exceeding four persons, gains control of the corporation. And the term "control" means ownership of stocks in a corporation possessing at least fifty one per cent (51%) of the total voting power of all classes of stocks entitled to vote. (See Section 35(c) (5-c), NIRC) In other words, the law requires that 51% of the stocks shall be owned by no more than five (5) persons. If it takes more than five persons to gain control of the corporation, then the exchange does not come within the purview of Section 35(c)(2)(c) of the Tax Code. It appearing from the abovementioned transaction that two transferors, Dr. Stephen Zuellig and Mr. Gilvert Zuellig will gain control of the corporation by owning approximately 84% of the Zuellig Corporation's outstanding capital stock, the exchange hereinabove described comes within the purview of Section 35(c)(2)(c) of the Tax Code and consequently, each of the transferors shall be entitled to the exemption provided for in the aforesaid law. It should be emphasized, however, that Section 35(c)(2)(c) of the Tax Code merely defers recognition of gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the property or of the stocks involved in the exchange, the original or historical cost of the property or the stocks is considered. Thus, the basis of the stocks received by the transferors shall be the same as the basis of the property exchanged therefor; and the basis of the property transferred in the hands of the transferee corporation shall be the same as it would be in the hands of the transferors (Section 35(c)(4) of the Tax Code). The issuance by the Zuellig Corporation of its shares of stock to the transferors in exchange for their Pharma and F.E. Zuellig (M) Inc. stocks is not subject to the % of 1% stock transaction tax. In this connection, you are further advised that in order that the parties to the exchange can avail of the privilege provided for in Section 35(c)(2) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned. (a) The transferors must file with their income tax returns for the taxable year in which the exchange was consummated a complete statement of all facts pertinent to the exchange, including: (1) A description of the property transferred, or of their respective interest in such property, together with a statement of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the transfer; (2) The kind of stock received and preference, if any; (3) The number of shares of each class received; and (4) The fair market value per share of each class at the date of the exchange. (b) On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated the following: (1) A complete description of the property received from the transferors; (2) A statement of the original acquisition cost or other basis thereof in the hands of the transferors and adjusted cost basis at the time of the transfer; (3) Information with respect to the capital stock of the corporation, including: (a) The total issued and outstanding capital stock immediately prior to and immediately after the exchange, with a complete description of each class of stock; (b) The classes of stock and number of shares issued to the transferors in the exchange; (c) The fair market value of the capital stock as of the date of exchange which was issued to the transferors. In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayers participating in the exchange showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of stocks received in the exchange. cdi Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."