BIR Ruling [DA-209-05]

April 27, 2005 BIR RULING [DA-209-05] 28 (B) (5) (c); 176; DA-668-2004 Contreras & Limqueco Law Offices Ground Floor, ESL Building, Anda Circle, Port Area, 1002 Manila Attention: Atty. Cyril R. Contreras Tax Counsel Gentlemen : This refers to your letter dated November 25, 2004 requesting for a ruling that the transfer of shares of stock in Taian (Subic) Electric, Inc. ("Taian Subic") by Taian Electric Co., Ltd., of Taiwan ("Taian Taiwan") , a nonresident foreign corporation to TECO Electric & Machinery Co., Ltd. ("TECO") , likewise a non-resident foreign corporation pursuant to a corporate reorganization is not subject to the capital gains tax imposed under Sections 28(B)(5)(c) and 176 of the Tax Code of 1997. It is represented that Taian Subic is 76.70% owned by Taian Taiwan, a non-resident foreign corporation; that in September 30, 2003, Taian Taiwan and TECO merged whereby the latter was the surviving corporation; that in effect, the mother company of Taian Subic is now TECO; that however, as of today, the stock ownership of Taian Taiwan with Taian Subic has not yet been transferred in the name of the new company, TECO, as far as the records of the Securities and Exchange Commission ("SEC") is concerned; and that according to the SEC, before it will transfer the stock ownership previously in the name of Taian Taiwan into TECO, it is necessary to secure a ruling from the BIR whether or not taxes, if any, are due on the above transaction and a BIR clearance be also secured if taxes are required to be paid. In connection therewith, you now request for confirmation of your opinion that: 1. The transfer of the Taian Subic shares of stock from Taian Taiwan into TECO pursuant to a merger effected in accordance with the laws of Taiwan is not a taxable event in the Philippines, hence, not subject to the 5%/10% capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code; and 2. The transfer of the shares above-mentioned is got subject to the documentary stamp tax imposed under Section 176 of the Tax Code since the merging companies are both non-resident foreign corporations and are not subject to Philippine tax. In reply thereto, please be informed as follows: 1. The transfer of the shares in Taian Subic from Taian Taiwan to TECO is a legal consequence of the merger of Taian Taiwan with TECO, with the latter as the surviving corporation. A merger does not involve a sale, exchange or disposition of shares since there is no transfer of beneficial ownership over the shares. In a merger, the surviving corporation succeeds to the rights and liabilities of the absorbed corporation and merely carries on the identity of the latter. Hence, no taxable transaction actually took place in the Philippines (BIR Ruling No. UN397-95 dated October 14, 1995). Accordingly, the transfer of the Taian Taiwan to TECO pursuant to a merger effected in accordance with the laws of Taiwan is not subject to the 5%/10% capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997. 2. Since the transfer of shares by Taian Taiwan to TECO involves domestic shares, which are the shares in Taian Subic, such transfer is subject to documentary stamp tax imposed under Section 176 of the Tax Code of 1997 at the rate of P1.50 per P200.00 or a fractional part thereof, of the par value of the shares transferred. cITAaD Therefore, the transfer of the Taian Taiwan shares in Taian Subic to TECO is subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. ( BIR Ruling No. ITAD-24-05 ) 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group