BIR Ruling [DA-022-04]

January 15, 2004 BIR RULING [DA-022-04] Sec. 29; R.R. 2-2001; 025-02; DA-086-03 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Romulo S. Danao, Jr. Tax Division Gentlemen : This refers to your letter dated November 13, 2003 requesting on behalf of your client, Vishay Philippines, Inc. (VPI) ,for confirmation of your opinion that VPI is a publicly held corporation as defined under Revenue Regulations No. 2-2001, and hence, exempt from the Improperly Accumulated Earnings Tax (IAET) imposed under Section 29 of the Tax Code of 1997. It is represented that VPI is a domestic corporation duly organized and existing under Philippine laws with principal office in Taguig, Metro Manila; that VPI is a wholly owned subsidiary of Vishay Semiconductors GmbH (Vishay GmbH),a corporation existing under the laws of Germany; that Vishay GmbH is in turn owned 100% by Vishay Europe GmbH (Vishay Europe),another corporation existing under the laws of Germany; that Vishay Europe in turn, is owned by the following entities: (1) 1% by Vishay Dale Electronics, Inc.,a U.S. corporation that is a wholly owned subsidiary of Vishay Dale Holdings, Inc.,another corporation existing under the laws of the State of Delaware, USA, which is in turn owned 100% by Vishay Intertechnology Inc. (VII); (2) 3% by ZTR Electronics Limited, 2.4% by Vilna Equities Holdings B.V.,23.3% by VIEC Limited, and 1.5% by Draloric Israel Limited, all of which are wholly owned subsidiary of Vishay Israel Limited which in turn is wholly-owned by VII; (3) 55.7% by Vishay Israel Limited which is wholly owned by VII; and (4) 13.1 % by VII; that Vishay Intertechnology, Inc. (VII),a US corporation whose shares are listed and traded in the New York Stock Exchange (NYSE),is the ultimate parent of VPI ;that based on the information filed with the United States Securities and Exchange Commission (SEC),as of June 30, 2003, Vishay Intertechnology, Inc. (VII) has 1,771 stockholders of record for their common stock and the twenty (20) largest stockholders of VII own an aggregate of 49.63% of VII's issued and outstanding common shares; and that in support of your request you submitted to this Office the following documents: 1. Vishay Intertechnology Inc.'s 2002 Annual Report; 2. Vishay Intertechnology's Financial Statement for 2002 (incorporated in annual report); 3. Authenticated and notarized Certification executed by Vishay Intertechnology Inc.'s Chief Financial Officer (CFO),on the capital structure and stockholders base of Vishay Intertechnology Inc.;and 4. Latest General Information Sheet (GIS) filed by VPI with the Securities and Exchange Commission (SEC). In reply, please be informed that pursuant to Section 4 of Revenue Regulations No. 2-2001, "Implementing the Provision on Improperly Accumulated Earnings Tax under Section 29 of the Tax Code of 1997" viz : "For purposes of these Regulations, closely-held corporations are those corporations at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held corporations ." DSTCIa For purposes of determining whether the corporation is a closely held corporation ,insofar as such determination is based on stock ownership, the following rules shall be applied: (1) Stock Not Owned by Individuals Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries. (2) Family and Partnership Ownership An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family, or by or for his partner. For purposes of this paragraph, the 'family of an individual' includes his brothers or sisters (whether by whole or half blood) spouse, ancestors and lineal descendants. (3) Option to Acquire Stocks If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option and each one of a series of option shall be considered as an option to acquire such stock. (4) Constructive Ownership as Actual Ownership Stock constructively owned by reason of the application of paragraph (1) or (3) hereof shall, for purposes of applying paragraph (1) or (2),be treated as actually owned by such person; but stock constructively owned by the individual by reason of the application of paragraph (2) hereof shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. Such being the case, since VPI is a wholly-owned subsidiary of VII, such shares will be considered as being owned proportionately by the VII shareholders. The ownership of a domestic corporation for purposes of determining whether it is a closely held corporation or a publicly held corporation is ultimately traced to the individual shareholders of the parent company .Thus, where at least 50% of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by at least 21 or more individuals, the corporation is considered a publicly-held corporation as the term is defined under the Regulations. Further, Section 29 of the Tax Code of 1997 provides, viz : "Sec. 29. Imposition of Improperly Accumulated Earnings Tax. (A) ... (B) Corporations Subject to Improperly Accumulated Earnings Tax . (1) In General . The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. (2) Exceptions The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-held corporation ; (b) Banks and other non-bank financial intermediaries; and (c) Insurance Companies. (Emphasis ours) xxx xxx xxx." Accordingly, this Office confirms your opinion that VPI is considered a publicly-held corporation exempt from the Improperly Accumulated Earnings Tax (IAET),based on the representation that as of June 30, 2003, Vishay Intertechnology, Inc. (VII) has 1,771 stockholders of record for their common stock and the twenty (20) largest stockholders of VII own an aggregate of 49.63% only of VII's issued and outstanding common shares. Thus, considering that the top 20 stockholders of VII do not hold at least 50% of the total outstanding capital stock of VII, VPI cannot be considered a closely held corporation but rather a publicly-held corporation. This ruling is being issued in 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. DCIAST Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group