BIR Ruling [DA-053-02]

March 27, 2002 BIR RULING [DA-053-02] Zambrano & Associates 27th Floor, 88 Corporate Center Sedeno cor. Valero Streets Makati City Attention: Attys. Daisy G. Zambrano and Marie Evangeline B. Bautista Gentlemen : This refers to your letter dated February 14, 2002 stating that your client, Cemex Asia Holdings, Limited (CAH) is a non-resident foreign corporation organized and existing under the laws of Singapore, that CAH owns 100% of the shares of stock of Maya Enterprises, Inc. (Maya), a non-resident foreign corporation organized and existing under the laws of the Cayman Islands; that in turn, Maya owns shares of stock in two (2) corporations organized and existing under the laws of the Republic of the Philippines as follows: (1) One Hundred Twenty Thousand (120,000) common shares of stock (representing 40% of the shares of stock) of Bedrock Holdings, Inc. (Bedrock); and (2) Three Million Seven Hundred Fifty Two Thousand Two Hundred Sixteen (3,752,216) common shares of stock (representing 40% of the shares of stock) of Sandstone Strategic Holdings, Inc. (Sandstone); that CAH is in the process of reorganizing its corporate structure and after a review of the operations of its various subsidiaries and affiliate, it has decided to liquidate Maya; that this liquidation will result in greater efficiency and economy in the management of CAH's businesses; that this exercise would also allow CAH to make productive use of its properties and obtain favorable financing and credit facilities; that to implement this part of the reorganization, the Board of Directors and shareholders of Maya approved its voluntary liquidation and the appointment of a liquidator on August 28, 2001; that as a consequence of the liquidation of Maya, all its assets and liabilities, including its shares in Bedrock and Sandstone, were transferred to CAH pursuant to separate deeds and agreements for the assignment and transfer of those assets and liabilities; that the final shareholder's meeting of Maya approving the actions of the liquidator was held on October 24, 2001; and that thereafter, a final notice of liquidation dated October 24, 2001 was filed with the Registrar of Companies in the Cayman Islands. Based on the foregoing representations, you now request confirmation of your opinion that "1. The transfer of all the shares of stock of Maya in Bedrock and Sandstone to CAH 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 Tax Code; "2. The receipt by CAH of the Bedrock and Sandstone shares of stock owned by Maya as liquidating dividends is not subject to Philippine income tax since any gain therefrom is derived from sources outside the Philippines; "3. The transfer of shares of stock of Bedrock and Sandstone from Maya to CAH is subject to documentary stamp tax (DST) at the rate of P1.50 per P200 par value or fractional part thereof under Section 176 of the Tax Code; and "4. Upon presentation of the proof of payment of DST, the respective corporate secretaries of Bedrock and Sandstone can register the transfer of the ownership of the shares from Maya to CAH in the Stock and Transfer Books of these corporations, and after cancellation of the stock certificates issued in the name of Maya, to issue the corresponding stock certificates in the name of CAH as the transferee." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. The transfer of all the shares of stock of Maya in Bedrock and Sandstone to CAH is not a taxable event in the Philippines. This Office in BIR Ruling No. DA008-2001 dated January 30, 2001 has already ruled that 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 transfer by Maya, the liquidating corporation, of its remaining assets to CAH, its sole stockholder, is not considered a sale of these assets. Consequently, such transfer is not subject to the 5%/10% capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997. 2. CAH as the shareholder of Maya will realize a capital gain or loss on its receipt of the liquidating dividends consisting of the shares in Bedrock and Sandstone. 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. v. Meer, 78 Phils. 655 [1947]) However, any gain derived by CAH arising from the transfer of the said shares in case of liquidation is considered gain derived from sources outside the Philippines since Maya, the entity being liquidated, is a non-resident foreign corporation. As a non-resident foreign corporation, CAH is taxable only on income derived from sources within the Philippines. (BIR Ruling No. 252-91 dated November 20, 1991) Accordingly, the receipt by CAH of the Bedrock and Sandstone shares as liquidating dividends is not subject to Philippine income tax. 3. However, the transfer of the Bedrock and Sandstone shares from Maya to CAH is subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997 at the rate of P1.50 for every P200.00 or fractional part thereof, of the par value of the shares transferred. 4. Finally, upon presentment of proof of payment of the documentary stamp tax, the respective Corporate Secretaries of Bedrock and Sandstone register the transfer of the shares from Maya 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, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group