BIR Ruling [DA-208-03]

July 4, 2003 BIR RULING [DA-208-03] Secs. 175, 176, 178 039-97; 171-92 Padilla Law Office 7/F Padilla De Los Reyes Building 232 Juan Luna Street Binondo, Manila Attention: Atty. Sabino B. Padilla IV Gentlemen : This refers to your letter dated November 13, 2002 stating that your client, Filipino Fund, Inc. (FFI) is a closed-end mutual fund organized and existing under Philippine laws and with office address at the 17th Floor, Bank of the Philippine Islands Building, Ayala Avenue corner Paseo de Roxas Street, Makati City; that FFI was incorporated in 1991 and its shares are listed and traded in the Philippine Stock Exchange (PSE) since 1995; that FFI's assets consist of (a) shares of stock in corporations listed and traded in the PSE; (b) fixed income instruments which are limited to government securities or treasury bills; and (c) unlisted assets, which consist of four (4) condominium units each covered by separate condominium certificates of title, participation in two (2) common trust funds, and shares of stock in three (3) corporations whose shares are not listed and traded in the PSE; that based on the audited financial statement of FFI as of December 31, 2002, FFI has an accumulated deficit in the amount of P401,572,718.00; that on September 26, 2002, in a meeting called for the purpose by its Board of Directors, FFI recently undertook a corporate reorganization, which is essentially a partial liquidation, and was subsequently approved by the FFI's stockholders in a meeting called on November 26, 2002; that the features of this corporate reorganization are as follows: (1) The transfer of the assets of FFI where FFI: (a) incorporated an open-end fund (called the Philippine Index Fund or PIF) and infused cash in said open-end fund in exchange for shares of stock in said open-end fund; and (b) transferred its non-listed assets and property holdings in a Special Purpose Trust (SPT) in exchange for Participation Certificates in said SPT; (2) In the creation of the PIF, FFI contributed an initial subscription of P58,500,000.00 in cash in exchange for 500,000 shares in PIF (PIF had an initial authorized capital of P200,000,000.00 consisting of 2,000,000 shares with a par value of P100.00/share). These shares were subject to a lock-up period of twelve months. Following this cash subscription for shares, the authorized capital of PIF was further increased to P500,000,000.00 consisting of 5,000,000 shares with par value of P100.00/share, with FFI subscribing to additional 2,550,000 PIF shares for cash; (3) The amendment of the Articles of Incorporation of FFI to reduce its authorized capital stock from P850,000,000.00 consisting of 850,000,000 shares with par value of P1.00 per share to P78,951,850.00 consisting of 78,951,850 shares with par value of P1.00 per share or a reduction of P771,048,150.00; (4) The reduction surplus of P771,048,150.00 resulting from the decrease in issued and outstanding capital stock was used to wipe out the negative earned surplus of FFI which, as of December 31, 2002, amounted to P401,572,718.00; (5) The remaining reduction surplus after wiping the negative earned surplus was to be returned to FFI shareholders on record-as of the date of the approval by the SEC of the proposed amendment of the Articles of Incorporation of FFI-in the form of their pro-rata shares in the open-end fund (PIF) and participation certificates in the SPT; (6) On March 14, 2003, the SEC approved the amendment to the Articles of Incorporation of FFI thereby authorizing the decrease in the capital stock of FFI under the terms above-described. The SEC also issued on the same date a Certificate of Filing of Certificate of Decrease of Capital Stock of FFI; (7) As already pointed out, the SEC approved the reduction of the authorized capital stock of FFI in contemplation of the above-described partial liquidation of FFI. Before that, the Philippine Stock Exchange was informed of the contemplated corporate reorganization of FFI and, in fact, trading of FFI shares was suspended for ten (10) days immediately after the date that the SEC approved the decrease in authorized capital stock of FFI; and (8) Upon the SEC's approval of the partial liquidation of FFI on March 14, 2003, each FFI shareholder shall surrender the FFI shares held by him/her and receive: (a) three (3) PIF shares for every one thousand (1,000) FFI shares they held; (b) one (1) unit of participation in the SPT, evidenced by a participation certificate in the SPT, for every one (1) FFI share; and (c) thirty (30) new FFI shares for every one thousand (1,000) of the existing FFI shares. that the culmination of this partial liquidation of FFI resulted in a liquidating dividend consisting of 2,384,685 PIF shares (with a net asset value of P114.2/share or total value of approximately P273.6 million) and 794,895,000 participation units in the SPT (with a net asset value of P.091/unit or a total value of approximately P72 million (distributed to FFI shareholders; that the reduction surplus of P771,648,150.00 was used to (a) wipe out the negative earned surplus of P401,572,718.00; and (b) cover the liquidating dividend of P345,641,892.80; and that the remainder of P24,433,539.20 represents the value of 165,315 PIF shares which if distributed to shareholders in FFI, will result in said shareholders getting fractional shares. Based on the foregoing; representations, you now request confirmation of your opinion that "1. A documentary stamp tax equivalent to 1% of the par value of the PIF shares issued ( i.e. , the 500,000 PIF shares issued on the initial subscription plus the 2,550,000 PIF shares issued on the additional subscription) is due under Section 175 of the NIRC; "2. With respect to the SPT, there shall be no documentary stamp tax or any other tax collected upon the transfer by FFI to the SPT of the shares FFI holds in unlisted companies, the remaining fixed income instruments and the condominium units covered by separate condominium certificates of title since there shall have been no change in the beneficial ownership thereof. A documentary stamp tax equivalent to 0.25% of the face value of the participation certificates that shall be issued by the SPT directly in favor of shareholders of FFI is due under Section 178 of the NIRC; "3. Upon the transfer of PIF shares directly to FFI stockholders, a documentary stamp tax equivalent to 0.75% of the par value of said PIF shares is due under Section 176 of the NIRC; and "4. No other tax is due from FFI, PIF or SPT under the corporate reorganization (partial liquidation) above-described. However, shareholders of FFI shall derive a capital gain or loss on the difference between their tax basis (cost) of the FFI shares surrendered in the partial liquidation and the fair market value of the liquidating dividends they receive." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Section 175 of the Tax Code of 1997 provides that on every original issue, whether on organization, reorganization or for any lawful purpose, of shares of stock by any association, company or corporation, there shall be collected a documentary stamp tax of Two pesos (P2.00) on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of stock. Accordingly, a documentary stamp tax of Two pesos (P2.00) on each Two hundred pesos (P200) of the par value of the PIF shares issued and subscribed by FFI shall be paid on the 500,000 shares of stock or with an aggregate par value of P50,000,000.00 and on the additional subscription of 2,550,000 PIF shares or with an aggregate par value of P255,000,000.00. 2. In BIR Ruling No. 039-97 dated April 3, 1997, this Office ruled that "In reply, please be informed that the conveyance of the legal title over the shares to a trustee or nominee without transfer of beneficial title and without any consideration does not involve an actual transfer of ownership over the shares, hence, not subject to the capital gains tax and documentary stamp tax. Thus, your opinion that the transfer of legal title over the shares from the lodging stockholders to PCD Nominee Corp., or from PCD Nominee Corp. to the uplifting stockholders, is not subject to capital gains tax or stock transaction tax and documentary stamp tax because there is no actual transfer of ownership over the aforementioned shares of stock is hereby confirmed. (BIR Ruling Nos. UN-258-95, 123-93, 124-93, 125-93, 127-93 and 129-93) However, the transfer of beneficial ownership over the lodged shares shall be subject to capital gains tax or stock transaction tax, as the case may be, and to documentary stamp tax." Considering that there is no actual transfer of beneficial ownership of the shares held by FFI in unlisted companies, including the remaining fixed income instruments and the condominium units which are covered by separate condominium certificates of title, to SPT, no documentary stamp tax and other transaction tax shall be due on the said transactions. However, a documentary stamp tax of fifty centavos (0.50) on each Two hundred pesos (P200) of the face value of the PCs, issued by SPT to the shareholders of FFI evidencing their ownership in SPT, shall be imposed under Section 178 of the Tax Code of 1997. 3. Section 176 of the Tax Code of 1997 provides that on all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of certificates of stock in any association, company or corporation, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such due-bill, certificate of obligation or stock. Such being the case, the transfer of PIF shares directly to FFI stockholders shall be subject to the documentary stamp tax imposed in Section 176 of the said Code. 4. Finally, this Office has consistently ruled that a company under partial liquidation is not subject to any tax for receiving from its stockholders surrendered shares and for canceling the reduced shares. However, the liquidating gains or losses sustained by the FFI shareholders upon surrender of their FFI shares in exchange for the three (3) PIF shares for every one thousand (1,000) FFI shares they held, one (1) unit of participation in the SPT for every one (1) FFI share and thirty (30) new FFI shares for every one thousand (1,000) of the existing FFI shares are taxable income or deductible loss as the case may be pursuant to Section 73 of the Tax Code of 1997 in relation to Section 27(A) of the said Code. EaIDAT The gain realized or loss sustained by FFI shareholders shall be computed based on the difference between the fair market value of the real properties, book value of the investment in shares in PIF and participation in SPT, and other assets received, net of liabilities assumed, and the acquisition or adjusted cost of the FFI shares surrendered by FFI shareholders. Moreover, the net liquidating gain or income will be subjected to the income tax rate of 32% as ordinary income depending on whether the shareholders of FFI are corporation and/or individual. (BIR Ruling Nos. 119-84; 136-88; 171-92; UN248-94) The liquidating gain in a partial liquidation is taxed at 32% as in the case of complete liquidation. (BIR Ruling Nos. 171-92; 21-89; 136-88; 322-87; and UN119-84) 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group