BIR Ruling [DA-008-01]

January 30, 2001 BIR RULING [DA-008-01] 28 (B) (5) (C) 595-88; 295-88 Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30/F Citibank Tower 8741 Paseo de Roxas Makati City Attention: Atty . Priscilla b . Valer and Atty . Jayson L . Fernandez Gentlemen : This refers to your letter dated March 17, 2000 requesting for confirmation that the transfers of shares of stock in Triple Dime Holdings, Inc. ("Triple Dime") and Edgewater Ventures Corporation ("Edgewater") by the nonresident foreign corporations named below pursuant to a corporate reorganization are not subject to the capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code. It is represented that Cemex Asia Holdings, Limited ("CAH") is a nonresident foreign corporation organized and existing under the laws of Singapore; that CAH owns 100% of the shares of stock in Serang International Limited ("Serang"), a nonresident foreign corporation organized and existing under the laws of the British Virgin Islands; that Serang owns 100% of Romana Investments Limited ("Romana") and Desbarra Investments, Inc. ("Desbarra"), both of which are nonresident foreign corporations organized and existing under the laws of the British Virgin Islands; that Romana owns 2,360,000 common shares with a par value of P100.00 per share in Triple Dime (the "Triple Dime Shares"), a corporation organized and existing under the laws of the Philippines; that Desbarra owns Four Hundred Fifty Eight Thousand (458,000) shares with a par value of P100.00 per share in Edgewater (the "Edgewater Shares"), a corporation organized and existing under the laws of the Philippines; that CAH is in the process of reorganizing its corporate structure; that a review of the operations of its various subsidiaries had shown that the merger of Romana and Desbarra into Serang and the subsequent liquidation of the merged company would result in greater efficiency and economy in the management of CAH's businesses and would allow it to make more productive use of its properties and obtain favorable financing and credit facilities; that to implement CAH's plan of reorganization, Romana and Desbarra (together with two other companies registered in the British Virgin Islands) were merged into Serang on July 14, 1999 pursuant to the laws of the British Virgin Islands; that as a consequence of such merger, all the assets and liabilities of Romana and Desbarra (including the Shares) were transferred to Serang by operation of law; that after the merger, the Shares were directly owned by Serang which in turn is wholly-owned by CAH; that on February 23, 2000, Articles of Dissolution of Serang were filed with the Registrar of Companies of the British Virgin Islands to complete the reorganization. As a consequence of the dissolution of Serang, CAH will succeed to all the assets and liabilities of Serang including the Shares. In connection therewith, you now request for confirmation of your opinion that: "1. The transfer of the Triple Dime Shares and Edgewater Shares from Romana and Desbarra to Serang pursuant to a merger effected in accordance with the laws of the British Virgin Islands is not a taxable event in the Philippines, hence, not subject to the 5%/10% capital gains tax imposed under Section 28(B)(5)(c) of the Ta x Co de; "2. The second transfer of the Triple Dime Shares and Edgewater Shares from Serang to CAH as a consequence of the dissolution of the former is likewise not subject to the 5%/10% capital gains tax imposed under Section 28(B)(5)(c) of the Ta x Co de; "3. The receipt by CAH of the Triple Dime Shares and Edgewater Shares as liquidating dividends is not subject to Philippine income tax since any gain arising from the surrender of shares in Serang would be a gain derived from sources outside the Philippines. "4. However, both transfers of the shares described in nos. 1 and 2 above are subject to the documentary stamp tax at the rate of P1.50 per P200.00 or a fractional part thereof of the par value of the shares transferred in accordance with Section 176 of the Ta x Co de; and "5. Upon presentment of proof of payment of DST, the respective corporate secretaries of Triple Dime and Edgewater can register the transfer of the shares from Romana and Desbarra to Serang and from Serang to CAH in the Stock and Transfer Books of the Corporations and cancel and issue new stock certificates in the name of the transferee." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. The transfer of the shares in Triple Dime and Edgewater from Romana and Desbarra to Serang is a legal consequence of the merger of the three companies, with Serang as the surviving corporation. A merger does not involve a sale, exchange or disposition of shares since there is no transfer of beneficial ownership over the shares. In a merger, the surviving corporation succeeds to the rights and liabilities of the absorbed corporation and merely carries on the identity of the latter. Hence, no taxable transaction actually took place in the Philippines (BIR Ruling No. UN397-95 dated October 14, 1995). Accordingly, the transfer of the Triple Dime Shares and Edgewater Shares from Romana and Desbarra to Serang pursuant to a merger effected in accordance with the laws of the British Virgin Islands is not subject to the 5%/10% capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997. 2. A liquidating corporation does not realize gain or loss in the distribution of its remaining assets to its shareholders as a consequence of its liquidation. The transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale of these assets (BIR Ruling No. 171-92 dated May 28, 1992). Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation ( W . P . Fox & Sons, Inc . v . Commissioner of Internal Revenue, 15 BTA 115; Jordan Petroleum Company, 13 AFTR 2d 1692, JTS Brown & Son Company v . Commissioner of Internal Revenue , 10 TC 840). Accordingly, the second transfer of the Triple Dime Shares and Edgewater Shares from Serang to CAH as a consequence of the dissolution of the former is likewise not subject to the 5%/10% capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997. (BIR Ruling No. 295-88 dated July 5, 1988) 3. CAH as the shareholder of Serang (the corporation being liquidated) will realize a capital gain or loss on its receipt of the liquidating dividends consisting of the Shares. The transfer of shares by a stockholder to a corporation under liquidation in exchange for assets of the liquidated corporation is considered a sale ( Wise & Co. vs. Meer , 78 Phils. 655 [1947]). The gain consists of the difference between the fair market value of the liquidating dividends and the acquisition cost or adjusted cost to CAH of its shareholdings in Serang. Any gains realized by CAH upon the liquidation of Serang is not subject to Philippine tax since the same will be realized by CAH, a nonresident corporation, as a consequence of the sale (surrender of shares in liquidation) of its shares of stock in Serang, another nonresident foreign corporation. Such gains would not have been realized from Philippine sources. CAH, being a nonresident foreign corporation is subject to tax in the Philippines only on its Philippine-source income (BIR Ruling No. 252-91 dated November 20, 1991). Your opinion that the receipt by CAH of the Triple Dime Shares and Edgewater Shares as liquidating dividends is not subject to Philippine income tax is hereby confirmed. 4. However, the two transfers of the Triple Dime Shares and the Edgewater Shares from Romana and Desbarra to Serang and then from Serang to CAH are each subject to the documentary stamp tax imposed under Section 176 of the Tax Code at the rate of P1.50 for every P200.00 or fractional part thereof, of the par value of the shares transferred. 5. Upon presentment of proof of payment of DST, the respective corporate secretaries of Triple Dime and Edgewater can register the transfer of the shares from Romana and Desbarra to Serang and from Serang to CAH in the stock and transfer books of the respective corporations and cancel and issue new stock certificates in the name of the transferee. 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, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group