BIR Ruling

March 22, 1974 Miss Expectacion Isip 457 Del Monte Avenue Quezon City M a d a m : This refers to your letter dated September 27, 1973 requesting information as to the tax consequence of the following transaction, to wit: "1. X Company was incorporated for the primary purpose of acting as general managers and as management and investment consultant. cdta "In this connection, X Company entered into a contract with Y Corporation to manage it. Three of the majority stockholders perform the management service for X Corporation, however no contract was made between the stockholders and X Company, nor were they indicated as the persons to perform the service in the contract with Y Corporation. Please note that during the last half of the taxable year, 50% of the outstanding stocks is owned by four individuals, and that the management fees collected are distributed to the stockholders performing the service. "On the basis of the above facts, can X Company be considered a personal holding company? What are its tax liabilities if any? "2. B. Corporation will be incorporated to engage in the business of acting as professional manager or consultant providing management service and preparation of project studies. Of the five incorporators, two are Certified Public Accountants, one Marketing Man and two accountants. Since in carrying out the business each of the incorporators contributes knowledge based on their respective fields, could this be considered as practice of profession?" In reply, I have the honor to inform you that under Section 64 of the National Internal Revenue a corporation is considered a personal holding company if for the taxable year 80% or more of its gross income is personal holding company income consisting of dividends, interest, royalties, annuities, (See Section 65(a), Tax Code) and more than 50% in value of its outstanding stock is owned, directly or indirectly by or for not more than five individuals at any time during the last half of the taxable year. In other words, the two requirements must be present in order that the corporation can be considered a personal holding company for tax purposes. As presented, not one of the income mentioned in Section 65(a) of the Tax Code forms part of the gross income of X Company. As such, it does not come within the purview of a personal holding company. Hence, it is subject only to income tax imposed by Section 24 of the Tax Code. For engaging in management service, X Company comes within the term "independent contractor" as defined by Section 191 of the Tax Code, subject to the 3% contractor's tax and income tax. B. Corporation is likewise considered as an independent contractor because its activities (professional manager, consultant, management service and preparation of project studies) consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such corporation or its employees. It is also subject to the income tax. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5