BIR Ruling [DA-030-06]

February 2, 2006 BIR RULING [DA-030-06] Sec. 24 (B) (2); 156-94 DA 246-03; DA 061-01 Romulo Mabanta Buenaventura Sayoc & de los Angeles 30/F Citibank Tower 8741 Paseo de Roxas Makati City Attention: Attys. Wilma M. Valdemoro-Cua Jayson L. Fernandez & Connie G. Chu Gentlemen : This refers to your letter dated September 2, 2005, requesting confirmation of your opinion that the cash and property dividends declared out of the company's retained earnings and distributed by Concepcion Industries, Inc. (CII) to its stockholders which are all domestic corporations, shall not be subject to income tax, withholding tax and documentary stamp tax. It is represented that CII is a corporation duly organized and existing under the laws of the Philippines with principal address at 308 Sen. Gil J. Puyat Avenue, Makati City; that it is engaged in the business of, among others, the manufacture, assembly, and trading of appliances and machines; that the stockholders of CII as of February 26, 2004 are as follows: No. of Shares Percentage Name Nationality Subscribed Interest Hyland Realty & Development Corp. Filipino 1,260,663 33.33% Foresight Realty & Development Corp. Filipino 1,260,663 33.33% Horizons Realty, Inc. Filipino 1,260,663 33.33% Raul T. Concepcion Filipino 1 - Raul Joseph A. Concepcion Filipino 1 - Raul Anthony A. Concepcion Filipino 1 - Renna Elizabeth H. Angeles Filipino 1 - Rafael G. Hechanova Filipino 1 - Raissa Gloria H. Posadas Filipino 1 - Jose S. Concepcion Jr. Filipino 1 - John Marie A. Concepcion Filipino 1 - Jose Ma. Salvador Concepcion Filipino 1 - Total 3,781,998 100% ====== ==== that on February 26, 2004, the Board of Directors of CII declared a portion of its unrestricted retained earnings as of December 31, 2003 as dividends in favor of all stockholders of the Company as of February 26, 2004, consisting of cash in the total amount of P8,120,000.00 and the following properties consisting of shares of stock and real properties with a total book value of P5,500,000.00 currently owned and registered in the name of CII: ETDHaC (a) Real properties including all the improvements thereon, if any, situated in Sucat, Paraaque covered by Transfer Certificate of Title Nos. 89352 and 89353 (the "Sucat Property"); (b) Real properties including all the improvements thereon, if any, situated in Alabang, Muntinlupa covered by Transfer Certificate of Title Nos. 295362, 295360, 165635, S-8004, and S-8005 (the "Alabang Property"); and (c) Forty-four thousand (44,000) shares of stock in Concepcion Industrial Realty Development Corporation (the "CRDC Shares") covered by stock certificate nos. 001, 004, 016 and 018; that the cash and property dividends will be distributed among the stockholders of CII as of February 26, 2004 in the following manner: PROPERTY BOOK CASH Percentage SHAREHOLDER DIVIDEND VALUE DIVIDEND Total (%) (PhP) (PhP) (PhP) Horizons Realty, Inc. CRDC Shares 4,400,000.00 140,000.00 4,540,000.00 33.33% Hyland Realty & Sucat Property 700,000.00 3,840,000.00 4,540,000.00 33.33% Development Corp. Foresight Realty & Alabang 400,000.00 4,140,000.00 4,540,000.00 33.33% Development Corp. Property TOTAL 5,500,000.00 8,120,000.00 13,620,000.00 100% ======== ======== ========= ===== that the properties will be distributed at their book value and the book value of the property dividends together with the cash dividends will be charged against retained earnings of CII as of December 31, 2003 which is more than sufficient to cover such property dividend declaration at book value; that on August 23, 2005, the Securities and Exchange Commission approved CII's declaration of cash dividends in the amount of P8,120,000.00 and property dividends in the total amount of P5,500,000.00 as described above. HECaTD From the foregoing, you are requesting confirmation of the following: 1. The stockholders of CII shall not be subject to any income tax, capital gains tax or withholding tax upon their receipt of the cash and real properties by way of dividends pursuant to Section 27(D)(4) of the Tax Code; 2. The property dividends declared consisting of shares of stock and real properties shall be recorded at their respective book value in the books of both CII and the recipient stockholders of CII; 3. The Deeds of Conveyance to be executed by CII and its recipient stockholders covering the shares of stock and real properties, not being a sale and being without monetary consideration, shall not be subject to any documentary stamp tax other than the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code. In reply, please be informed as follows: 1. Section 27(D)(4) of the Tax Code states: "SEC. 27. Rates of Income Tax on Domestic Corporations . xxx xxx xxx (D) Rates of Tax on Certain Passive Incomes . xxx xxx xxx (4) Intercorporate Dividends . Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax." Accordingly, the cash and property dividends declared and distributed by CII to its stockholders which are domestic corporations shall not be subject to income tax pursuant to Section 27(D)(4) of the Tax Code of 1997. Consequently, the subject cash dividends in the amount of P8,120,000.00 and the property dividends in the amount of P5,500,000.00 shall not be subject to any withholding tax. ( BIR Ruling No. 277-93 dated June 28, 1993; 197-93 dated May 7, 1993 ) TaSEHC 2. The property dividends consisting of shares of stock and real properties shall be recorded at their book value in the books of both the issuing corporation and the recipient stockholders. ( BIR Ruling No. 156-94 dated November 16, 1994; DA-292-97 dated August 28, 1997; DA-583-99 dated October 6, 1999 ) 3. The transfer of real properties to the above-named stockholders in the manner provided above, not being in connection with a sale and the same being without monetary consideration, shall therefore, not be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. However, the deed of conveyance on the said transfer of real properties shall be subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the same Code. ( BIR Ruling No. 156-94 dated November 16, 1994; DA-263-97 dated August 6, 1997; DA-268-98 dated June 25, 1998; DA-488-99 dated August 26, 1999; DA-061-01 dated April 10, 2001; DA-246-03 dated July 25, 2003 ) The Deed of Conveyance covering the shares of stock declared as property dividends shall be subject to a documentary stamp tax of P0.75 for every P200.00, or fractional part thereof, of the par value of the shares transferred pursuant to Sec. 175 of the Tax Code, as amended by Republic Act No. 9243. Finally, property dividends which constitute stocks in trade or properties primarily held for sale or lease, which shall be distributed by CII to its stockholders and declared out of their retained earnings, beginning January 1, 1996 and thereafter, shall be subject to VAT based on the market value or zonal valuation whichever is higher, at the time of receipt. ( BIR Ruling No. DA-173-97 dated April 16, 1997 ) IaAScD 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 Commissioner of Internal Revenue