BIR Ruling [DA-105-96]

March 11, 1996 BIR RULING [DA-105-96] Victoria L. Araneta Properties, Inc. R. Magsaysay St., Victoneta Park, Malabon, Metro-Manila Attention: Mr . Francisco A . Segovia President Gentlemen : This refers to your letter dated February 9, 1996 stating that Victoria L. Araneta Properties, Inc. (VLA) and Victoneta Inc. (VI) are both domestic corporations duly organized and existing under and by virtue of the laws of the Philippines; that pursuant to the plan of merger, VLA and VI will effect a statutory merger with VLA as the surviving corporation; that VLA and VI have determined that the merger will effect greater efficiency and economy in their management and operation since both of them are engaged in the real estate business; that VLA shall continue to possess all rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation; that VLA' s articles of incorporation and by-laws shall not be affected by the merger; that VI shares of stock (other than held by VLA) shall be converted into VLA shares at the rate of one (1) VLA for every one (1) VI shares; that VLA shall therefore and thereafter possess all the rights, privileges, immunities, licenses, permits and powers of VI, all property real or personal, and all receivables due on whatever account including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to VI shall be taken and deemed to be transferred to and vested in VLA without further act or deed; and any accrued claims or pending action or proceeding by VI may be prosecuted by VLA; that VLA shall be responsible and liable for the liabilities and obligations of VI in the same manner as if VLA had itself incurred such liabilities or obligations, and any accrued claim, or pending action or proceeding against VI may be prosecuted against VLA; that neither the rights of the creditors nor any lien upon the property of VI shall be impaired by the merger, provided, however, that VLA shall have the right to exercise all the defenses, rights, privileges, setoffs and counter claims of every kind and nature which VI may have under the premises. cdt In connection therewith, you are requesting confirmation of your opinion that "1. The merger of VLA and VI in which all the assets and liabilities of VI will be transferred to VLA which will survive the merger qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 34(c)(2). Thus, no gain or loss shall be recognized to VLA and VI upon the transfer of the assets and liabilities; "2. The merger will not be subject to gift tax since there is no intention to donate on the part of any of the parties; and "3. The transfer of VI tangible assets will not be subject to value-added tax." In reply, please be informed that the above reorganization is a merger within the contemplation of Section 34(c)(2) and (6)(b) of the Tax Code because a corporation, VLA will acquire all the assets and assume all the liabilities of VI solely for stocks, the transaction to be undertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by VI of all its assets and liabilities to VLA solely in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to VI upon the distribution of VLA shares to VI and its stockholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code. No gain or loss shall be recognized to VI and its stockholders upon the exchange of their stocks solely for VLA stocks under Section 34(c)(2) of the Tax Code. The basis of the assets received by VLA shall be the same as it would be in the hands of VI. The basis of VLA stocks received by the stockholders of VI shall be the same as the basis of VI stocks surrendered in exchange therefor. If the total liabilities to be assumed by VLA upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by VI, the excess shall be recognized as gain of VI [Section 34(c)(4)(b), Tax Code, as amended by P.D. No. 1773]. It is understood, however, that upon the subsequent sale or exchange of the assets or shares of stock acquired by the parties, the gain derived from such sale or exchange shall be subject to income tax. The abovementioned transactions shall not be subject to the gift tax as there is no intention to donate on the part of any of the parties. The transfer of VI's tangible assets to VLA as a consequence of the merger shall not be subject to VAT. (Sec. 4.100-5 (b)(3) Revenue Regulations No. 7-95) However, in order that the above-described reorganization can be considered as merger under Section 34(c)(2) and (6)(b) of the Tax Code, the parties to the merger should comply with the following requirements: A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation, which is a party to the reorganization, shall file, as part of its return for the taxable year within which the reorganization occurred a complete statement of all facts pertinent to the non-recognition of gains or loss in connection with the reorganization, including: (1) A copy of the plan of reorganization, together with a statement, executed under the penalties of perjury, showing in full the purposes thereof and in detail all transactions incident to, or pursuant to the plan. (2) A complete statement of the cost or other basis of all property, including all stocks or securities, transferred incident to the Plan. (3) A statement of the amount of stock or securities and other property or money received from the exchange, including a statement of all distribution or other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value thereof at the date of the exchange. (4) A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject. B. Every taxpayer, other than a corporation, a party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the non-reorganization of gains or loss upon such exchange including: (1) A statement of the cost or other basis of the stock or securities transferred in the exchange; and (2) A statement in full of the amount of stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property received is subject. The amount of each kind of stock or securities and other property (other liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at the date of the exchange. C. Permanent records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liabilities assumed on the exchange, or any liabilities to which any of the properties received were subject), in order to facilitate the determination of gain or loss from a subsequent disposition of such stock or securities and other property received from the exchange (par. 9803-B, P-H 1963 ed., p. 9611) In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporation participating in the merger showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stocks received as a consequence of the merger. (BIR) Ruling No. 250-91 dated November 15, 1991) 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, and/or any or the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)