BIR Ruling [DA-088-06]

March 6, 2006 BIR RULING [DA-088-06] BIR Ruling No. DA-475-05 Siguion Reyna Montecillo & Ongsiako 4th & 6th Floors, Citibank Center 8741 Paseo de Roxas Makati City Attention: Atty . Cesar P . Manalaysay Atty . Jose Lis C . Leagogo Atty . Monina V . Vierneza-Dejon Gentlemen : This refers to your letter dated October 10, 2005 requesting on behalf of your client, The Thomson (Philippines) Corporation ("TPC"), for confirmation of your opinion that the proposed transfer of shares in TPC ("TPC shares") from TTC (1994) Limited ("TTC") to Thomson Holdings, B.V. ("THBV") is not subject to tax since the transfer is part of a worldwide corporate reorganization and also because the beneficial ownership of the TPC shares will remain within The Thomson Corporation group ("The Thomson Group of Companies"), the transferor and the transferee being all subsidiaries of the Thomson Corporation, their ultimate parent. SIAEHC As represented, TTC is a corporation organized under the laws of England and Wales. THBV is a corporation organized and existing under the laws of the Netherlands, and is engaged in the business of a finance and holding company, among the objects of which includes the "holding and disposal of participations and shares in companies and enterprises." Based on the worldwide corporate structure of the Thomson Group of Companies, a. TTC is 100%-owned by The Thomson Organization Ltd. (England); and b. THBV is 92.871%-owned by Thomson Finance SA (immediate parent) and 7.129%-owned by Intertext Group Limited. TTC, THBV, Intertext Group Limited and TPC all belong to The Thomson Group of Companies. TTC shall transfer 23,991 shares which constitutes 99.96% of the total outstanding capital stock in TPC with a par value of P100.00 per share to THBV. In support of your request, you attached photocopies of the following documents: 1) TTC's Memorandum of Association and Articles of Association, respectively, adopted by Special Resolution passed on October 12, 1988 and incorporating all amendments to December 11, 1995; 2) English translation of the Deed of Amendment to the Articles of Incorporation executed on August 19, 1997; 3) The Thomson Group of Companies worldwide corporate structure chart; and 4) Key Facts Data Sheets for the following companies: TTC, THBV; and TPC. In reply, please be informed as follows: 1. The proposed transfer of shares in TPC from TTC to THBV pursuant to a legitimate worldwide corporate reorganization and without consideration is not subject to capital gains tax . In numerous rulings issued by this Office, we ruled that the transfer of shares of stock in a Philippine company by a nonresident foreign corporation to another nonresident foreign corporation belonging to the same group of companies, pursuant to a legitimate worldwide corporate reorganization, is exempt from capital gains tax since there is no effective transfer of beneficial ownership of the shares in the Philippine company. There being no transfer of beneficial ownership, no gain will be realized by both the transferor and the transferee from the transfer of the shares ( BIR Ruling Nos. DA-209-05 dated April 27, 2005; DA-642-04 dated December 17, 2004; DA-500-03 dated December 11, 2003; DA-144-03 dated May 5, 2003; DA-130-03 dated April 25, 2003; 347-87 dated November 5, 1987; BIR Ruling No. 161-83 dated September 14, 1983 ). Based on the foregoing, the proposed transfer of the TPC shares from TTC to THBV, pursuant to a worldwide corporate reorganization of The Thomson Group of Companies, is not subject to capital gains tax as (1) there is no effective transfer of beneficial ownership of the TPC shares since both Transferor and Transferee belong to The Thomson Group of Companies and (2) the proposed transfer is a mere realignment of stockholdings effectively consolidating beneficial and legal ownership of the TPC shares. Since there is no transfer of beneficial ownership, no gain will be realized by TTC and THBV for income tax purposes. 2. The proposed transfer of shares in TPC from TTC to THBV pursuant to a legitimate worldwide corporate reorganization and without consideration is not subject to donor's tax . This Office has consistently ruled that the transfer of property, without consideration, and primarily made for business considerations is not subject to donor's tax under Section 98 of the Tax Code because under such circumstances, no donative intent can be attributed to the transferor ( BIR Ruling Nos. DA-174-98 dated April 30, 1998 ; DA-028-05 dated January 24, 2005 ; and DA-136-05 dated April 7, 2005 ). Where the proposed transfer of the TPC shares will be made without consideration, the same is not subject to donor's tax in the absence of donative intent. It has been consistently held that in a direct gift, the element of donative intent must be present in the transfer of property to be donated ( BIR Ruling No. DA-567-04 dated November 9, 2004 ; DA-338-03 dated October 7, 2003 ; DA-588-99 dated October 07, 1999 ; DA-403-99 dated July 13, 1999 ; DA-550-98 dated December 04, 1998 ; Perez vs. Commissioner of Internal Revenue , CTA Case No . 1707, February 10, 1969 ). The proposed transfer of the TPC shares will be made primarily for business considerations, i.e., in connection with a worldwide corporate reorganization and to consolidate beneficial and legal ownership into the Transferee. Thus, the proposed transfer to be made without consideration is not subject to donor's tax since there is no donative intent that can be attributed to the Transferor. Furthermore, both the Transferor and the Transferee are subsidiaries and part of The Thomson Group of Companies and there is no transfer of beneficial ownership of the TPC shares. The BIR has also ruled that there can be no donative intent on the part of the transferor in a transfer of properties to the member-beneficiaries, considering that a person or entity cannot donate properties the ownership of which belongs to themselves ( BIR Ruling No. DA-318-99 dated May 21, 1999 ). Thus, the proposed transfer of TPC shares by TTC to THBV, without consideration and in connection with a global corporate restructuring, is not subject to donor's tax. 3. The proposed transfer by TTC of its TPC shares to THBV is subject to DST . The proposed transfer by TTC of its TPC shares to THBV is subject to DST. Under Section 4 of Revenue Regulations No. 13-2004, implementing Section 176 of the Tax Code of 1997, as amended, all transfer of shares of stocks of a domestic corporation are subject to the DST upon execution of the deed transferring ownership or rights thereto, or upon delivery, assignment or indorsement of such shares in favor of another. No transfer of shares of stock shall be recorded unless DST thereon has been duly paid for in accordance with Section 201 of the same Tax Code ( BIR Ruling No. DA-209-2005 dated April 27, 2005 and BIR Ruling No. 475-05 dated November 21, 2005 ). 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 the ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue