BIR Ruling

June 4, 1968 Mr. William Fields P.O. Box 1094 Manila, Philippines S i r : This refers to your letter dated May 18, 1968 requesting legal opinion on a query stated as follows: "If any person invests property in a new corporation so that he receives 85% or more of the stock or equity of that new corporation, is that person liable for any tax on the said transfer of his assets from himself to a company which he owns at least 85% thereof?" "If he is liable, what is the smallest percentage of stock that he would have to own in a new corporation to which he has transferred his own private property for stock in order to be exempt from any tax on said transfer, particularly any capital gains tax?" In reply thereto, I have the honor to inform you that pursuant to Section 35 paragraph 2(c) of the Tax Code of the Philippines, 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 of which as a result of such exchange said person, alone or together with others not exceeding four persons gain control of said corporation provided, that stocks issued for services shall not be considered as issued in return for property. The term 'control' means ownership of corporate shares of stock representing at least 51% of the total voting power of all classes of stock of the corporation. Accordingly, the transfer by the person referred to in your query of his assets to a new corporation in exchange for 85% of its shares of stock may qualify as tax-free exchange under the provisions of Republic Act No. 4522, provided, however, that the following rules incident to incorporation are duly complied with: "The transferor must file with his income tax return 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 his 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 transfer; (2) The kind of stock received and preference if any; (3) The number of shares of each class received; (4) The fair market value per share of each class at the date of the exchange; On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated: (1) A complete description of all property received from the transferor; (2) A statement of the original acquisition cost or other basis thereof in the hands of the transferor and the adjusted cost basis at the time of 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 complete description of each class of stock; (b) The classes of stock and number of shares issued to the transferor in the exchange; (c) the fair market value of the capital stock as of the date of exchange which was issued to the transferor;" In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayer participating in the exchange showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of stock received in the exchange. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue