BIR Ruling [DA-096-06]

March 8, 2006 BIR RULING [DA-096-06] 50; DA-004-04 SGV & Co. 6760 Ayala Avenue Makati City Attention: M.F.A. Balili Gentlemen : This refers to your letter dated August 15, 2005 stating that on September 13, 2005, a Loan Agreement was entered into between Marubeni Corporation (Marubeni), a corporation organized and existing under the laws of Japan with principal office at 4-2, Ohtemachi I-chome, Chiyoda-ku, Tokyo, Japan, and Lipa Ecozone Properties, Inc. (LEPI), a corporation organized and existing under the laws of the Philippines with principal office at 17th Floor Liberty Center, 104 H.V. dela Costa Street, Salcedo Village, Makati City; that LEPI's outstanding capital stock is forty percent (40%) owned by Marubeni while the remaining sixty percent (60%) is owned by Celestial Corporation (Celestial), a company organized and existing under the laws of the Philippines; and that pursuant to the said Loan Agreement, Marubeni lent to LEPI a loan in the aggregate amount not exceeding Fifty Million Japanese Yen, for the following contractual purposes: "Article 9 "Section 9.1(a) The monies borrowed pursuant to this Agreement shall be utilized by the BORROWER solely for the purpose of payment of cost and operational and capital expenses incurred for the day-to-day operation of the BORROWER , including but not limited to: "(i) payment of the real property taxes and other fees due on the properties being held by the BORROWER; (ii) maintenance fees required to be paid by BORROWER to Lima Land, Inc.; (iii) marketing expenses for the sale of the real properties held by the BORROWER; and (iv) trustee cost." (emphasis supplied) Based on the foregoing representations, you now request confirmation of your opinion that no interest income shall be imputed on the interest-free loan extended by Marubeni to LEPI considering that the said loan was extended solely to finance the operational and capital expenditure of LEPI. In reply thereto, please be informed that Section 50 of the Tax Code of 1997 provides that "Sec. 50. Allocation of Income and Deductions . In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business." EaScHT Corollarily, Revenue Memorandum Order No. 63-99 provides that this applies to all forms of bona fide indebtedness and includes: 1. Loans or advances of money or other consideration (whether or not evidenced by a written instrument); 2. Indebtedness arising in the ordinary course of business out of sales, leases, or the rendition of services by or between members of the group, or any other similar extension; 3. But does not apply to alleged indebtedness which was in fact a contribution of capital or a distribution by a corporation with respect to its shares. In BIR Ruling No. DA004-04 dated January 6, 2004 , which is a reiteration of BIR Ruling No. 199-99A dated December 3, 1999 , this Office ruled that ". . . inter-corporate advances are not covered by Revenue Memorandum Order (RMO) No. 63-99 dated July 19, 1999. Section 2.3 of RMO states that it does not apply to indebtedness which was in fact a contribution to capital. The foregoing inter-corporate advances are analogous to capital contribution since it is based on percentage of stockholdings of the stockholders making the advances. The fact that some individual stockholders in some instances are not able to contribute to the fund constituting the advances does not destroy its character as an analogous capital contribution. In other instances where the advances are made due to financial need of borrowing company and the financial ability of the lending company, it is clear that these are emergency loans to help a related company which is short of capital. These are not the instances covered by Section 4.1. of the RMO which would authorize the Commissioner of Internal Revenue to allocate interest income under Section 50 of the Tax Code of 1997 because such inter-corporate loans are clearly transactions, done for tax avoidance or evasion purposes." "Accordingly, the interest-free shareholder's advances/loans made by RLI to RCBC Realty are in the nature of capital contributions and therefore not covered by RMO No. 63-99 and consequently not subject to the imputed interest under the aforesaid RMO. As such, any income received by RLI from its shareholder's advances to RCBC Realty are not subject to income tax and consequently to withholding tax. SaCDTA "xxx xxx xxx" The interest-free shareholder's advances/loans in the above-cited ruling are in the same nature as those lent by Marubeni to LEPI because the said loan shall only be utilized by the latter for operational and capital expenditures and therefore not covered by RMO No. 63-99 as such not subject to the imputed interest under the aforesaid RMO. WHEREFORE, in view of the foregoing , this Office hereby confirms your opinion that no interest income should be imputed on the interest-free loan extended by Marubeni considering that the said loan was made in order for LEPI to meet its various financial obligations. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service