BIR Ruling [DA-046-04]

February 5, 2004 BIR RULING [DA-046-04] S. 24 DA-221-02/11-25-02 SGV & Co. 6760 Ayala Avenue Makati City Attention: E. C. Alcantara Tax Division Gentlemen : This refers to your letter dated October 29, 2003 requesting on behalf of your client, JHN Holding Company, Inc. , (JHN for brevity), for a confirmation of your opinion that the additional capital contributions of stockholders of JHN through the transfer of shares of stock in various domestic corporations in favor of JHN, without the necessity of issuing additional shares of stock is deemed capital investment which is not included within the purview of the term "taxable income" and is not subject to the income tax, donors tax and documentary stamp tax. The facts, as you represent, are as follows: JHN is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office at ODC Building, Salcedo St., Legaspi Village, Makati City. It is a holding company organized primarily for the purpose of investing in, holding, purchasing, acquiring, leasing, contracting or otherwise dealing in, within the limits allowed by law, any and all real and personal properties of every kind and description and to do every act and thing covered generally and normally by the term "holding company", with an authorized capital stock of P335,600,000, Philippine Currency, divided into 3,356,000 common shares of par value of P100 per share. Mary June Wong and Linda Ng-Kawsek are the registered stockholders of JHN and various domestic corporations known as the Makati Supermarket Group (MSG for brevity). The total aggregate par value of the MSG shares registered in the names of Mary June Wong and Linda Ng-Kawsek amounts to Twenty Million Three Hundred Ninety Nine Thousand Six Hundred Pesos (P20,399,600.00). By virtue of the corporate reorganization of JHN, and in order to provide additional funds as operating capital of JHN, Mary June Wong and Linda Ng-Kawsek executed a Deed of Assignment dated October 23, 2003 and contributed their respective MSG shares in favor of JHN, without the issuance of additional shares by JHN. The capital contribution of Mary June Wong and Linda Ng-Kawsek to JHN's capital account shall be in the form of paid-in surplus and recorded as Additional Paid-in Capital in the books of JHN. After the contribution of the shares to JHN, the existing stockholder's of record of the corporation shall maintain their proportionate shareholdings in JHN. The capital structure of JHN before and after the transfer of shares may be illustrated as follows: Stockholders Before the Transfer of After the Transfer of Shares in MSG Shares in MSG Equity Percentage of Equity Percentage of Value of Ownership Ownership Premium Joseph Henry Ng 2 00% 2 00% 2,914,228.57 Pacita O. Ng 3 00% 3 00% 2,914,228.57 Peter T. Ng 405,049 40% 405,049 40% 2,914,228.57 Josephine N. Lo 162,022 16% 162,022 16% 2,914,228.57 Christine Chuang 162,022 16% 162,022 16% 2,914,228.57 Linda Ng Kawsek 141,769 14% 141,769 14% 2,914,228.57 Mary June Wong 141,769 14% 141,769 14% 2,914,228.57 Total 1,012,636 100% 1,012,636 100% P20,399,600.00 Notwithstanding the capital contribution, there will result no change in the proportionate equity shareholdings of the seven (7) stockholders since JHN will not issue shares of stock in favor of the transferors as consideration for the transfer of the MSG shares. Instead the value of the shares transferred shall be recorded as Additional Paid-In Capital in the books of JHN. In reply, please be informed that in BIR Ruling DA-221-02 dated November 25, 2002, this Office ruled that: ". . . where a corporation requires additional funds for conducting its business and obtains said funds through voluntary payments by its shareholders, the amounts so received being credited to its surplus account or to a special capital account, will not be considered income , although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as part of the operating capital of the company. Corollarily, in BIR Ruling No. 586-88 dated December 19, 1988, this Office had the occasion to rule that the additional contribution in the form of donated surplus without the necessity of issuing additional shares of stock is deemed capital investment which is not included within the purview of the term "taxable income" and is not subject to income tax. In another occasion, this Office ruled that additional capital contribution without necessarily issuing additional shares of stock, which merely increase the basis of the stockholders' stock but not their proportionate equity in the corporation, is a transaction not subject to income or gift taxes. (BIR Ruling Nos. 270-87 dated September 8, 1987; 127-89 dated June 13, 1989) Accordingly, the infusion of APIC by US Filter into Vivendi-Phils, is in the nature of additional funds which will be used as, and forms part of, the latter's working capital for which no corresponding shares of stock will be issued. As such, the APIC does not constitute an income on the part of Vivendi-Phils. Considering that the infusion of the APIC will not result in the issuance of shares of stock by Vivendi-Phils., the same shall not be subject to documentary stamp tax imposed under Section 175 of the Tax Code of 1997." (Emphasis supplied.) Accordingly, no taxable gain or loss shall be recognized both to the transferor and the transferee on the transfer by the individual stockholders of their shares of stock in favor of JHN since the transfers were made as capital contributions in JHN whereby the transferees in the transfer of the shares to JHN do not realize taxable income and therefore are not subject to Philippine income tax. Moreover, the capital infusion shall effect no change in the equity shareholdings of the stockholders of JHN. The transfer will merely increase the basis of the stockholders' stock but not their proportionate equity in the corporation. Hence, the transaction not subject to income or gift taxes. AHDacC Finally, considering that the infusion of the APIC will not result in the issuance of shares of stock by JHN, the same shall not be subject to documentary stamp tax imposed under Section 175 of the Tax Code of 1997. However, the transfer of the subject shares of stocks to JHN shall be subject to documentary stamp tax under Section 176 of the 1997 Tax Code. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group