BIR Ruling [DA-203-99]

March 30, 1999 BIR RULING [DA-203-99] Sycip Salazar Hernandez & Gatmaitan Sycip Law-All Asia Capital Center 105 Paseo de Roxas Makati City Attention: Atty . Ernesto S . Taio, Jr . Gentlemen : This refers to your letter dated November 5, 1998 requesting for a ruling on the tax consequences of the merger of your clients, All Asia Capital and Trust Corporation (AACTC), All Asia Properties Corporation (AAPC), All Asia Alabang Properties Corporation (AAAPC), All Asia Cebu Properties Corporation (AACPC) and All Asia Capital-Cepalco Properties Corporation (AACCPC). It is represented that AACTC is a domestic corporation duly organized in accordance with the laws of the Philippines; that it is authorized to engage among other things, in the acquisition, holding, operating, developing, leasing, mortgaging, exchanging and selling of real and personal properties of every kind and description or any interest therein; that AAPC, AAAPC, AACPC and AACCPC are corporations also organized in the Philippines and are likewise engaged, among other things, in the acquisition, exchanging, holding, selling, leasing, developing, mortgaging of any and all properties of every kind and description, including but not limited to real properties, condominium units and any interest or right therein; that the entire number of shares of the issued and outstanding capital stock of these five (5) corporations are fully paid (except as indicated below) and owned by the following stockholders: All Asia Capital and Trust Corporation: Share holder Group Number of Shares Chemphil, Inc. 24,852,766 Agatha corporation 5,660,908 First Optima Realty 6,765,476 Eusebio H. Tanco 5,182,217 AFP RSBS 25,620,133 Cepalco 6,790,206 Abaya, Benjamin C. 3,228,136 Abaya, Ramon C. 3,374,537 Iligan Cement Corporation 5,380,228 International Finance Corporation 13,725,071 Korea Merchant Bank 6,994,296 Paul Capital Partners 6,994,297 Land Bank of the Philippines 11,437,559 Others 11,994,170 Total 138,000,000 All Asia Properties Corporation: Share holder Group Number of Shares All Asia Capital and Trust Corporation 22,579,127 Sycip Salazar Retirement Plan 2,907,706 Supralex Holdings & Ventures Corp. 2,907,706 Agatha Builders Corporation 2,423,160 Cagayan Electric Power and Light co., Inc. 2,423,160 LMG Chemicals Corporation 639,415 Chemical Industries of the Philippines 639,414 Rolando U. Young 1,480,312 Total 36,000,000 All Asia Alabang Properties Corporation: Share holder Group Number of Shares All Asia Properties Corporation 6,000 Philippines First Insurance Co., Inc. 2,000 First Optima Realty Corp. 2,000 Total 10,000 All Asia Cebu Properties Corporation: Share holder Group Number of Shares All Asia Properties Corporation 6,000 Philippines First Insurance Co., Inc. 2,000 First Optima Realty Corp. 2,000 Total 10,000 All Asia Capital-Cepalco Properties Corporation Share holder Group Number of Shares All Asia Properties Corporation 1,500,000 Cagayan Electric Power and Light Co., Inc. 1,000,000 Total 2,500,000 that pursuant to a Plan of Merger, AAPC, AAAPC, AACPC and AACCPC intend to transfer all their assets and liabilities to AACTC in exchange for shares of stock of AACTC to be directly issued to stockholders of AAPC, AAAPC, AACPC, and AACCPC; that the stockholders of AAPC, AAAPC, AACPC and AACCPC, on the other hand, will surrender their AAPC, AAAPC, AACPC and AACCPC shares of stock to AAPC, AAAPC, AACPC and AACCPC, which will completely redeem all their outstanding shares of' stock; that the shares of stock of AACTC will then be issued directly to the stockholders of AAPC, AAAPC, AACPC and AACCPC; that finally, AAPC, AAAPC, AACPC and AACCPC will be dissolved and cease their corporate existence upon approval of the merger by the Securities and Exchange Commission; that the liabilities of AAPC, AAAPC, AACPC and AACCPC to be assumed by AACTC will not exceed the cost basis of the respective assets of AAPC, AAAPC, AACPC and AACCPC to be transferred to AACTC; that after the merger of AACTC, AAPC, AAAPC, AACPC and AACCPC, the total number and par value of shares outstanding and the total amount paid by each AACTC shareholder on their shareholdings will be as follows: Name Number of Shares Amount Paid-up Chemphil-LMG, Inc. 764,898 P7,648,980.00 Chemphil, Inc. 25,617,665 256,176,650.00 Agatha Corporation 8,559,608 85,596,080.00 First Optima Realty 7,705,360 77,053,600.00 Eusebio H. Tanco 5,182,217 51,822,170.00 Phils First Insurance Co. 3,266,685 32,666,850.00 AFP RSBS 25,620,133 256,201,330.00 Cepalco 10,464,140 104,641,400.00 Abaya, Benjamin C. 3,228,136 32,281,360.00 Abaya, Ramon C. 3,374,537 33,745,370.00 Iligan Cement Corporation 5,380,228 53,802,280.00 International Finance Corporation 13,725,071 137,250,710.00 Korea Merchant Bank 6,994,296 69,942,960.00 Paul Capital Partners 6,994,297 69,942,970.00 Land Bank of the Philippines 11,437,559 114,375,590.00 Sycip Salazar Retirement Plan 3,478,338 34,783,380.00 Supralex Holdings & Venture 3,478,338 34,783,380.00 Others 13,764,990 137,649,900.00 Total 159,036,496 1,590,364,960.00 and that the purpose of the merger of AACTC, AAPC, AAAPC and AACCPC is to effect greater administrative efficiency and an improved fiscal position which would be mutually advantageous and in the best interest of the constituent corporations and their respective stockholders. In connection therewith, you now request confirmation of your opinion that "1. The transactions described above, including the transfer and conveyance of all assets and liabilities of AAPC, AAAPC, AACPC and AACCPC to AACTC in exchange for shares of stock of AACTC, constitute a "merger" within the meaning of Section 40(C)(2) and (6)(b) of the National Internal Revenue Code of 1997, and AACTC, AAPC, AAAPC, AACPC and AACCPC will be parties to the merger; "2. No gain or loss shall be recognized by AAPC, AAAPC, AACPC and AACCPC upon the transfer and conveyance of their assets to AACTC and upon the assumption by AACTC of AAPC's, AAAPC's, AACPC's and AACCPC's liabilities, in exchange solely for AACTC stock to be directly issued to AAPC, AAAPC, AACPC and AACCPC shareholders pursuant to the plan of merger; "3. No gain or loss shall be recognized by the shareholders of AAPC, AAAPC, AACPC and AACCPC upon the issuance to them of AACTC shares pursuant to the plan of merger, and upon redemption of their AAPC, AAAPC, AACPC and AACCPC shares by AAPC, AAAPC, AACPC and AACCPC; "4. No gain or loss will be recognized by AACTC upon its receipt of the assets transferred by AAPC, AAAPC, AACPC and AACCPC and its assumption of the liabilities of AAPC, AAAPC, AACPC and AACCPC, as well as upon the issuance by AACTC of its shares of stock to AAPC, AAAPC, AACPC and AACCPC shareholders who surrender their AAPC, AAAPC, AACPC and AACCPC stock pursuant to the plan of merger; "5. No capital gains tax on stock transaction under the provisions of Section 39 of the National Internal Revenue Code of 1997 will be payable by AACTC, AAPC, AAAPC, AACPC or AACCPC shareholders upon the issuance by AACTC of its shares to AAPC AAAPC, AACPC and AACCPC shareholders who surrender their stocks to AACTC; and "6. The transfer of assets by AAPC, AAAPC, AACPC and AACCPC to AACTC for AACTC shares of stock will not be subject to donor's tax since there is no intention to donate on the part of either of the parties and the transaction is effected purely for bona fide business reasons." In reply, please be informed that your opinion is hereby confirmed as follows: 1. The above reorganization is a merger within the contemplation of, Section 40(C)(2) and (6)(b) of the Tax Code of 1997, because AACTC will acquire/assume all the assets and liabilities of AAPC, AAAPC, AACPC and ACCPC solely in exchange for shares of stock of AACTC, the proposed transaction to be undertaken being for a bona fide business purpose and not for the purpose of escaping the burden of taxation. 2. The transfer by AAPC, AAAPC, AACPC and AACCPC of all their assets and liabilities to AACTC solely in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 40(C)(2) and (6)(b) of the Tax Code of 1997. 3. No gain or loss shall be recognized by the shareholders of AAPC, AAAPC, AACPC and AACCPC upon issuance to them of AACTC shares under Section 40(C)(2) of the Tax Code of 1997 and no gain or loss shall be recognized to AAPC, AAAPC, AACPC and AACCPC upon the distribution of AACTC shares to AAPC, AAAPC, AACPC and AACCPC shareholders in complete redemption of their stocks under Section 40(C)(2) of the said Code. 4. No gain or loss shall be recognized by AACTC upon its receipts of the assets transferred by AAPC, AAAPC, AACPC and AACCPC and its assumption of the liabilities of AAPC, AAAPC, AACPC and AACCPC pursuant to Section 40(C)(4) of the Tax Code of 1997, as well as upon the issuance by AACTC of its shares of stock to AAPC, AAAPC, AACPC and AACCPC shareholders who surrender their AAPC, AAAPC, AACPC and AACCPC stock. 5. No capital gains tax on stock transaction under the provisions of Section 39 of the Tax Code of 1997 will be payable by AACTC, AAPC, AAAPC, AACPC or AACCPC shareholders upon the issuance by AACTC of its shares to AAPC, AAAPC, AACPC and AACCPC shareholders who surrender their stocks to AACTC, 6. The transfer of the assets by AAPC, AAAPC, AACPC and AACCPC to AACTC for AACTC shares of stock will not be considered as transfer of property for insufficient consideration subject to gift tax, since there is no intention to donate on the part of the parties and the transaction is effected purely for business reasons. However, the exchange of the land and improvements by AAPC, AAAPC, AACPC and AACCPC to AACTC for the latter's shares of stock shall be subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of the said Code, whichever is higher. Likewise, the exchange of the shares of stock of the said companies shall be subject to the documentary stamp tax imposed under Section 176 of the same Code. LLjur Moreover, the original issues of the Certificates of Stock of AACTC to the stockholders of AAPC, AAAPC, AACPC and AACCPC shall be subject to the documentary stamp tax imposed under Section 175 of the Tax Code of 1997. Finally, in order that the above-described reorganization can be considered as merger under Section, 40(C)(2) and (6)(b) of the Tax Code of 1997, 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 gain 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 all cost or other basis of all 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 of 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, 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-recognition of gain 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 properties 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. 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 subsequent disposition of such stock or securities and other property received from the exchange. In addition to the foregoing requirements, 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 stock received as a consequence of the merger. (BIR Ruling No. 472-93 dated December 3, 1993) 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.) BEETHOVEN L. RUALO Commissioner of Internal Revenue