Quiason Makalintal Barot Torres & Ibarra

January 26, 2007 BIR RULING [DA-041-07] 27 (D); 73 (A) 039-02; DA-521-04 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue Corner Pedro Poveda Street 1605 Ortigas Center, Pasig City Attention: Attys. Wilfredo E. Sanchez, Ruelito Q. Soriano & Benedict R. Tugonon Gentlemen : This refers to your letter dated December 15, 2006 requesting on behalf of your client, MICOBA HOLDINGS LIMITED ("MICOBA"), a ruling confirming the tax consequences of its liquidation in accordance with the International Business Companies Act of the Commonwealth of The Bahamas. It is represented that MICOBA is a company duly registered in the Commonwealth of The Bahamas with address at Ocean Centre, Montagu Foreshore, East Bay Street, Nassau, New Providence, The Bahamas. As of the date of its liquidation on November 1, 2006, the remaining assets of MICOBA consist only of 154,157 shares of stock in MICO EQUITIES, INC., a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines (the "Mico Shares"). The sole stockholder of MICOBA is PAN MALAYAN MANAGEMENT & INVESTMENT CO. ("PMMIC"), a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with address at 48th Floor, Yuchengco Tower, RCBC Plaza, 6819 Ayala Ave., Makati City. Pursuant to its liquidation, MICOBA will transfer all of its assets consisting of 154,157 MICO Shares to PMMIC, its sole shareholder. From the foregoing, you are requesting confirmation on MICOBA's position as follows: 1. The transfer of the MICO Shares to PMMIC pursuant to the liquidation of MICOBA is not subject to income tax or capital gains tax on the part of MICOBA. Likewise, the receipt by MICOBA of the surrendered shares from PMMIC is not subject to capital gains tax, nor to income tax; 2. The surrender by PMMIC for cancellation of the MICOBA shares is not subject to the documentary stamp tax imposed under Section 175 of the Tax Code. 3. The transfer of the MICO Shares to PMMIC is subject to the documentary stamp tax imposed under Section 175 of the Tax Code. 4. The liquidating gain or loss, if any, that PMMIC will realize from the liquidation is the difference between the fair market value of the liquidating dividends, which is the MICO Shares, and its cost in acquiring the MICOBA shares. In support of your request, you are submitting the following documents: 1. Copy of the Memorandum of Association of MICOBA; 2. Copy of the Certificate of Dissolution of MICOBA; 3. Copy of MICOBA Stock Certificate No. 16; and 4. Copies of the MICO Equities, Inc. Stock Certificates to be transferred to PMMIC as liquidating dividends. In reply, please be informed as follows: 1. MICOBA shall not be liable for income tax either on its receipt of the surrendered shares, or its transfer of its remaining assets to its sole stockholder, PMMIC, as liquidating dividend . In BIR Ruling No. 171-92 dated May 28, 1992, this Office ruled that the transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. ( W.P. Fox & Sons, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent , 15 BTA 115; Jordan Petroleum Company, 13 AFTR 2d 1692; 227 F. Supp. 174; J.T.S. Brown & Son Company v. Commissioner of Internal Revenue, 10 TC 840, cited in BIR Ruling No. 196-010-90-059-90 dated April 17, 1990). IHCESD Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial liquidation (BIR Ruling No. 171-92, supra ). Accordingly, MICOBA is not liable for income tax on either the transfer of its assets to its sole stockholder, PMMIC, nor on its receipt of the shares surrendered by the latter. (BIR Ruling No. 039-02 dated November 11, 2002 cited in BIR Ruling No. DA-521-04 dated October 6, 2004) 2. No documentary stamp tax ("DST") is due on the surrender and cancellation of the MICOBA shares . The Tax Code imposes a DST on the sale, assignment or transfer of shares of stock under Section 175 thereof, which in part reads: " Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Shares or Certificates of Stock . On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of certificates of stock in any association, company or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such stock, or to secure the future payment of money , or for the future transfer of any stock, there shall be collected a documentary stamp tax of Seventy-five centavos (P0.75) on each Two hundred pesos (P200.00), or fractional part thereof, of the par value of such stock . . . ." (emphasis supplied) No DST under the above quoted provision shall be due on the surrender of the MICOBA shares by PMMIC to MICOBA as a result of the latter's liquidation. The surrender of the shares does not constitute a sale, assignment or transfer because MICOBA is not taking title to the surrendered shares, and the shares are retired and not retained as treasury shares. In effect, MICOBA does not realize any benefit, as owner or otherwise, from its receipt of the shares. (BIR Ruling No. 039-02, supra .) 3. Transfer by MICOBA to PMMIC of the MICO shares as liquidating dividends is subject to documentary stamp tax on sale or transfer of shares of stock . The transfer by MICOBA of the MICO Shares to PMMIC is subject to the documentary stamp tax imposed under Section 175 of the Tax Code of 1997, as amended, at the rate of P.75 for every P200.00 of par value or a fractional part thereof. 4. PMMIC shall realize capital gain or loss when MICOBA distributes its assets as liquidating dividends . Section 73(A) of the Tax Code of 1997, as amended, provides in part, that "where a corporation distributes all its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder , whether individual or corporate, is taxable income or deductible loss , as the case may be." Liquidating gain or loss is in the nature of capital gain or loss, as the case may be, and therefore treated in the manner stated in Section 39 of the Tax Code of 1997, as amended. In BIR Ruling No. 039-02, supra , the Commissioner had ruled that the liquidating gain, i.e., the difference between the fair market value of the properties received vis--vis the cost basis of the shares to the stockholders, derived by a stockholder is subject to the ordinary income tax. Accordingly, the gain, if any, derived by the stockholders shall be subject to the regular income tax. Accordingly, the liquidating gain, if any, that PMMIC will realize from the liquidation is subject to the ordinary corporate income tax. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service