BIR Ruling [DA-004-04]

January 6, 2004 BIR RULING [DA-004-04] 32 (B) (7) (a); 191-99A; 215-91 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Veronica A. Santos Gentlemen : This refers to your letter dated September 15, 2003 stating that RCBC Realty Corporation (RCBC Realty) is a corporation organized and existing under Philippine laws; that its primary purpose is to engage in activities related to the acquisition, development, subdivision, sale, mortgaging, leasing, holding for investment and otherwise dealing in real estate of all kinds, nature and purpose; that RCBC Realty's activities consist primarily of the development and construction of the RCBC Plaza; that RCBC Realty has authorized capital stock of P2,886,933,300.00 divided into 14,255,163 Class A Preferred Shares with a par value of P100.00 per share, 6,807,085 Class B Preferred Shares with a par value of P100.00 per share, 1,000,000 Class BB Preferred Shares with a par value of P100.00 per share, and P6,807,085 Common Shares with a par value of P100.00 per share; that the shareholders of RCBC Realty are RCBC Land, Inc. (RLI) and Reco Rizal Pine Pte Ltd. (RRPPL),which respectively own sixty percent (60%) and forty percent (40%) of RCBC Realty; that RLI is a corporation organized and existing under the laws of the Philippines; that on the other hand, RRPPL is a non-resident foreign corporation organized and existing under the laws of Singapore and is 100% beneficially owned by the Government of Singapore; that RRPPL is incorporated under the Companies Act (Cap. 50) of Singapore as a Private Company Limited by shares; that its primary purpose is to carry on the business of investment and to act as a holding company and to undertake and to transact all kinds of investment business; that RRPPL is 100% owned by Recosia Pte Ltd. (Recosia),a corporation organized and existing under the laws of Singapore; that Recosia is also incorporated under The Companies Act (Cap. 50) of Singapore as a Private Company Limited by share; that it is 100% owned by the Government of Singapore Investment Corporation (Realty) Pte Ltd. (GICR),which is 100% directly owned by Government of Singapore Investment Corporation Pte, Ltd. (GIC),a financing institution wholly-owned and controlled by the Government of Singapore; that on May 31, 2002, a Memorandum of Agreement (MOA) was entered into by RLI, RRPPL, RCBC Realty and the Rizal Commercial Banking Corporation (RCBC),pursuant to a Shareholders' Agreement dated April 13, 1977 for the establishment of RCBC Realty as a joint venture company for the purpose of developing a condominium project known as the RCBC Plaza; that under the Shareholders' Agreement, RLI and RRPPL agreed to fund the requirements of RCBC Realty either through shareholders advances or additional equity infusion in proportion to their respective shareholdings in RCBC Realty, i.e. ,60:40; that pursuant to the MOA, RRPPL and RLI extended shareholders' loans to RCBC Realty to partially refinance on due dates maturing installments on RCBC Realty's syndicated loan and to fund building improvements for RCBC Plaza; that RRPPL granted a shareholder's loan to RCBC Realty in the amount of P620,829,707.00, which has been approved by the Bangko Sentral ng Pilipinas (BSP) on December 3, 2002; that the RRPPL Loan to RCBC Realty is financed with an advance from Recosia, RRPPL's sole shareholder; that in addition, RPPPL remitted the amount of P250,000,000.00 which was recognized and treated by RCBC Realty as deposit for future subscriptions to Class C Preferred Stock; that the total advances made by RRPPL, in the form of interest-free shareholder's loan and deposit on future subscription, is P870,829,707; that RLI also extended a shareholder's loan to RCBC Realty in the amount of P931,244,560.00; and that the respective shareholders' loans/advances extended by RLI and RRPPL to RCBC Realty are in proportion to their respective shareholdings, i.e. ,60:40. Based on the foregoing representations, you now request confirmation of your opinion that "1. The income received by RRPPL on its shareholder's loan and advances to RCBC Realty is excluded from gross income and consequently exempt from income tax and withholding tax pursuant to Section 32(B)(7)(a) of the Tax Code of 1997; "2. The income received by RLI on the shareholder's loan and advances granted to RCBC Realty is exempt from income tax and withholding tax pursuant to Section 2.3 of Revenue Memorandum Order No. 63-99; and "3. RCBC Realty is not required to withhold the tax on any income payment to its two shareholders, RRPPL and RLI, arising from the shareholders' loans and advances." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Section 32(B)(7)(a) of the Tax Code of 1997 provides that income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financial institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments shall not be included in gross income and shall be exempt from taxation. AEDISC Since as represented RRPPL is 100% owned by Recosia which on the other hand is 100% owned by the Government of Singapore Investment Corporation (Realty) Pte Ltd, a 100% directly owned by the Government of Singapore Investment Corporation Pte Ltd, likewise a financing institution wholly-owned and controlled by the Government of Singapore as contemplated under Section 32(B)(7)(a)(ii) of the Tax Code of 1997, any income received by RRPPL from its investment in the Philippines in the form of shareholder's loan and advances to RCBC Realty, are exempt from Philippine income tax and consequently from withholding tax. (BIR Ruling No. 215-91 dated October 24, 1991) 2. In BIR Ruling No. 199-99A dated December 3, 1999, this Office ruled that ". . . inter-corporate advances are not covered by Revenue Memorandum Order (RMO) No. 63-99 dated July 19, 1999. Section 2.3 of the RMO states that it does not apply to indebtedness which was in fact a contribution to capital. The foregoing inter-corporate advances are analogous to capital contribution since it is based on percentage of stockholdings of the stockholders making the advances. The fact that some individual stockholders in some instances are not able to contribute to the fund constituting the advances does not destroy its character as an analogous capital contribution. In other instances where the advances are made due to financial need of borrowing company and the financial ability of the lending company, it is clear that these are emergency loans to help a related company which is short of capital. These are not the instances covered by Section 4.1 of the RMO which would authorize the Commissioner of Internal Revenue to allocate interest income under Section 50 of the Tax Code of 1997 because such inter-corporate loans are clearly transactions, done for tax avoidance or evasion purposes." RLI 's shareholder advances to RCBC Realty, in the amount of P931,244,560.00 is in proportion to the percentage of its shareholdings in RCBC Realty, i.e. ,60%, vis--vis the shareholder's advances of RRPPL in the amount of P620,829,707, which is in proportion to the percentage of RRPPL's shareholdings in RCBC Realty, i.e. ,40%.The aforesaid advances were necessary to partially refinance on due dates maturing installments on RCBC Realty's syndicated loan in the amount of P1,700,000,000.00 and to fund building improvements for RCBC Plaza. Otherwise, without such advances, RCBC Realty would have defaulted on its maturing installments and would not have been able to complete building improvements for RCBC Plaza. In effect, they can be characterized as emergency loans to help a related company to meet its financial obligations. Accordingly, the interest-free shareholder's advances/loans made by RLI to RCBC Realty are in the nature of capital contributions and therefore not covered by RMO No. 63-99 and consequently not subject to the imputed interest under the aforesaid RMO. As such, any income received by RLI from its shareholder's advances to RCBC Realty are not subject to income tax and consequently to withholding tax. 3. Finally, it is therefore safe to conclude that RCBC Realty is therefore not required to withhold the tax on interest income otherwise due on the interest earned by RRPPL and RLI, respectively, on their shareholders' advances to RCBC Realty. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group