BIR Ruling [DA-077-98]

March 12, 1998 BIR RULING [DA-077-98] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty . S . U . Salvador, Jr . Tax Division Gentlemen : This refers to your letter dated December 2, 1997 requesting, on behalf of your client, Monterey Farm Corporation (MFC), for a ruling that the distribution of property dividends consisting of shares of stock in another domestic corporation, Monterey Foods Corporation (Monterey Foods), is not taxable. casia It is represented that MFC and Monterey Foods are domestic corporations duly organized and existing under and by virtue of Philippine laws; that MFC has an authorized capital stock of P80,000,000.00 divided into 5,200,000 Class "A" common shares and 2,800,000 Class "B" common shares, all with a par value of P10.00 each; that of the total authorized capital stock, 3,716,349 Class "A" shares and 1,833,425 Class "B" shares are outstanding and held by residents of the Philippines; that as of June 30, 1997, it has a total stockholders equity in the amount of P526,749,000.00, which includes unrestricted retained earnings in the amount of P389,268,000.00; that MFC plans to distribute to all existing stockholders a portion of the said retained earnings as property dividends consisting of shares of stock of Monterey Foods with a total book value of P379,794,000.00 as of June 30, 1997. In connection therewith, you now request confirmation of your following opinions "1. That MFC is not subject to income tax or capital gains tax when it declares to existing stockholders its entire shareholdings in Monterey Foods by way of property dividends; "2. That the stockholders of MFC who shall receive said property dividends shall not be subject to any income or capital gains tax arising from their receipt of the shares of stock of Monterey Foods. Consequently, the proposed distribution by MFC of its entire shareholdings in Monterey Foods to all its existing stockholders as property dividends shall not be subject to any withholding tax; "3. That the Deed of Conveyance to be executed by MFC and the recipient stockholders covering the shares of stock of Monterey Foods, not being a sale and without monetary consideration, shall not be subject to documentary stamp tax (DST) under Section 176 of the Tax Code, as amended; and "4. That the property dividends to be declared can be recorded at its book value in the records of MFC, and the stockholders of MFC can record the dividends received at the same book value as recorded in MFC's records. In reply, please be informed that your aforementioned opinions are hereby confirmed: 1. Dividends comprise any distribution, whether in cash or other property, in the ordinary course of business, even though extraordinary in amount, made by a domestic or resident foreign corporation to the stockholders out of its earnings or profits (Sec. 250, Income Tax Regulations). A dividend paid in stock of another corporation is not a stock dividend, even though the stock distributed was acquired through the transfer by the corporation declaring the dividends of property to the corporation the stock of which is distributed as a dividend. (BIR Ruling No. 554-88 dated November 22, 1988) Such being the case, MFC is not subject to income tax or capital gains tax when it declares and transfers its Monterey Foods shares as property dividends in favor of its stockholders. (BIR Ruling No. 154-93 dated April 28, 1993). A corporation realized no taxable income in declaring a dividend since the distribution of dividends among the stockholders is not a sale nor were assets used to discharge an indebtedness. (See General Utilities and Operating Co. vs. Helvering 296 U.S. 200-207) 2. That pursuant to Section 24(B)(2) of the Tax Code of 1997, income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax. Consequently, the proposed property dividend which shall be received by the stockholders of MFC shall be subject to a final withholding tax of zero (0%) percent, and the receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of the shares of stock of Monterey Foods as property dividend. 3. That the Deed of Conveyance to be executed between MFC and the recipient stockholders covering the shares of stock of Monterey Foods declared as property dividends, not being a sale and without monetary consideration shall not be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997 [formerly Sec. 176 of the Tax Code of 1977], but only to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997 [formerly Sec. 188 of the Tax Code of 1977]. 4. That the property dividends shall be recorded at book value in the books of both the issuing corporation and the recipient stockholders. (BIR Ruling No. 156-94 dated November 16, 1996) cdtech This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)