BIR Ruling [DA-080-02]

April 29, 2002 BIR RULING [DA-080-02] Sec. 27 (D) (2); 031-99; R.R. 26, sec. 191 Follosco Morallos & Herce Suite 311 Windsor Tower, 163 Legaspi St., Legaspi Village, Makati City Attention: Atty. Rachel P. Follosco Gentlemen : This refers to your letter dated September 28, 2000 requesting a confirmatory ruling that the conveyance of the KGI Philippines, Inc. (KGI Phils. for brevity) shares of stock by your client, KGI Securities One International Holdings Limited (KGI-1 for brevity), to KGI International Holdings Limited (KGI for brevity) is not subject to capital gains tax and documentary stamp tax on the sale of the shares of stock not listed and traded through the stock exchange. You represent that KGI-1 is a corporation duly organized and existing under the laws of Hong Kong. KGI, on the other hand, is a corporation duly organized and existing under the laws of Cayman Island. Under the Declaration of Trust dated May 12, 2000, KGI-1 acknowledged/confirmed that it received necessary funds from KGI for the purchase of an aggregate of 2,000,000 common shares of KGI Phils. (formerly CS-One Management Corporation), a duly organized and existing Philippine corporation; that on March 24, 2000, KGI-1 acquired 1,000,000 KGI Phils. shares; and that KGI is the beneficial owner of said 1,000,000 KGI Phils. shares and those that will thereafter be acquired. You now assert that in the event that the said shares are conveyed by KGI-1 (Trustee) to KGI (trustor-Beneficial owner), the said conveyance is not subject to capital gains tax on the grounds that: (1) there is no actual transfer of ownership over the subject shares, and (2) the conveyance of the subject shares is without valuable consideration. Moreover, you further assert that the said conveyance is likewise exempt from payment of documentary stamp tax on the transfer of shares pursuant to Section 191 of Regulations No. 26. You, however, admit that the notarial acknowledgment is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the 1997 Tax Code. In reply, please be informed that under Section 28(A)(7)(c) and B(5)(c) of the 1997 Tax Code , a final tax at the rates of 5% and 10% shall be imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange, or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. In the instant case, there is no sale, barter, or exchange of the subject shares since KGI is the real owner thereof while KGI-1 acted merely as Trustee. Accordingly, the transfer of the subject shares from KGI-1 to KGI without monetary consideration and by virtue of the Deed of Trust executed by and between KGI-1 and KGI is not subject to the capital gains tax. In BIR Ruling DA-125-97 dated March 21, 1997, this Office opined that the conveyance by the trustee in favor of the tractor of the subject properties which the former acquired by virtue of the trust agreement is not to be treated as another transfer separate and distinct from the sale between the original owner and the trustee. The conveyance is merely to be treated as a continuation and confirmation of title in favor of the ultimate and real beneficiary of the subject properties. This was reiterated in BIR Ruling No. 031-99 dated March 19, 1999. Furthermore, under Section 191 of Revenue Regulations No. 26 , the conveyance of property from a trustee to a cestui que trust without valuable consideration is not subject to tax. Thus, "Section 191. Conveyance to trustees or from trustee to cestui que trust, without consideration. Conveyances to a trust without valuable consideration, or from a trustee to a cestui que trust without valuable consideration are not subject to tax." Accordingly, your position that the said conveyance is likewise exempt from payment of documentary stamp tax on the transfer of shares pursuant to Section 191 of Regulations No. 26 is hereby confirmed. However, the notarial acknowledgment is subject to the documentary stamp tax of P15.00 imposed under Section 188 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Service