BIR Ruling

November 27, 1975 Mabuhay Vinyl Corporation Suite 501 V. Madrigal Bldg. Ayala Ave., Makati, Rizal Attention: Mr . Oscar A . Barrera Vice-President, Finance Gentlemen : This refers to your letter dated October 7, 1975 requesting information on the tax consequence arising from your redemption of no-par value common stocks and your issuance in their stead of par-value common shares at the rate of 1 no-par share to 20 par-value shares. Atty. Prisco N. Evangelista submitted a memorandum dated October 27, 1975 describing the transaction as follows: "An increase in capitalization is now pending in the Securities and Exchange Commission. In order to do away with the no-par shares, it is now proposed to redeem the shares without par value at the rate of P20.00 per share and to convert the same in common shares, P1.00 par value. The plan contemplates that the holder of the shares without par value would be entitled to subscribe to the shares in the increased capitalization. The value of the P50,000 shares without par value, as shown by the books, is P652,445 and as the no-par shareholders would be entitled to 1,000,000 shares, par value P1.00, the difference of P347,555 would be charged against paid-in surplus. Thus, the holders of no-par shares would realize gain of P347,555 but, they are allowed to invest the same in the new issue now pending in the Securities and Exchange Commission. It cannot, therefore, be said that there is no reinvestment on the part of the holders of the no-par value shares. They would be allowed to receive in cash the P347,555, but they would be subject to capital gain unless they decide to invest in the new issue." You now pose the following queries for your clarification: "1) Are our no-par value stockholders qualified to avail of the capital gain tax exemption under Sec. 5 of R.A. 5186? (MVC is registered with the Board of Investments on a non-pioneer status under R.A. 5186). 2) Is the date of acquisition of the no-par value shares considered as one of the criteria in determining the availment of capital gains tax exemption? "3) Will the BIR not question why the capital asset sold are no-par value shares of MVC and the proceeds invested in par-value shares also of MVC?" In reply, I have the honor to quote hereunder Section 5(b) of Republic Act No. 5186: "Sec. 5. Incentives to Investors in a Registered Enterprise . An investor with respect to his investment in a registered enterprise shall be granted the following incentive benefits: "(B) . . . "(b) Capital Gains Tax Exemption . Exemption from income tax on that portion of the gains realized from the sale, disposition, or transfer of capital assets, as defined in Section thirty-four of the National Internal Revenue Code, that corresponds to the portion of the proceeds of the sale that is invested in new issues of capital stock of a registered enterprise within six months from the date the gains were realized; Provided, (1) that the said sale, disposition or transfer and the investment of the proceeds thereof have been registered with the Board and the Bureau of Internal Revenue; (2) that the shares of stock representing the investment are not disposed of, transferred, assigned, or conveyed for a period of five years from the date the investment was made. If such shares of stock are disposed within the said period of five (5) years, all taxes due on the gains realized from the original transfer, sale or disposition of the capital assets shall immediately become due and payable." The above provision contemplates a situation wherein the proceeds, or portion thereof, not merely the gain derived from the sale, disposition or transfer of capital assets constitutes new and additional capital invested in the registered enterprise. Undoubtedly, the purpose of the provision is to encourage the placing of new investments in a registered enterprise. In the instant case, under the transaction described above, the value of the no-par shares does not represent a new investment in your enterprise; it was already an existing investment at the time the gain was realized. Under the circumstances, the said transaction does not come within the purview of Section 5(b). Republic Act No. 5186. Inasmuch as your first question is answered in the negative there is no longer any need to answer the other related questions. Very truly yours, (SGD.) EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3