SGV & Co.

March 28, 2008 BIR RULING [DA-209-08] 27; 105; 176; DA-088-06; DA-524-05; DA-475-05 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Luis Jose P. Ferrer Partner, Tax Services Gentlemen : This refers to your letter dated January 12, 2006 requesting on behalf of your client, Roche (Philippines) Inc. ("RPI"), confirmation of your opinion that the assignment without consideration by Chemical Manufacturing & Trading Co., Ltd. ("CMTC") and SAPAC Corporation Ltd. ("SAPAC") (collectively referred to herein as the Transferors) of their shares of stock in RPI to Roche Pharmholding BV ("Roche BV") (also referred to herein as the Transferee) pursuant to a legitimate worldwide corporate reorganization of the Roche Group of Companies where there is no change in beneficial ownership is not subject to capital gains tax, donor's tax, value-added tax and documentary stamp tax. It is represented that RPI, with principal office address at 2252 Chino Roces Avenue, Makati, Philippines, is a domestic corporation primarily engaged in the business of manufacturing, sale and distribution of general merchandise, goods and wares of all kinds and descriptions, particularly but not limited to chemicals, chemical compounds, extracts, drugs, medicines, druggists sundries, cosmetics, perfumeries, toilet articles, scientific apparatus and physicians' and hospital supplies. RPI has an authorized capital stock of Three Hundred Million Pesos (PhP300,000,000.00) divided into Thirty Million (30,000,000) shares with a par value of Ten Pesos (P10.00) per share. It has a subscribed capital of Two Hundred Million Pesos (PhP200,000,000.00) with a total of Twenty Million (20,000,000) shares issued and outstanding. CMTC, SAPAC and Roche BV are all corporations belonging to the Roche Group of Companies with Roche Holding Ltd., a corporation duly organized and existing under the laws of Switzerland, as the ultimate parent. CMTC is a corporation duly organized and existing under the laws of Bermuda, with principal office address at Corner House, Church & Parliament Streets, Hamilton HM 12, Bermuda. SAPAC, on the other hand, is a corporation duly organized and existing under the laws of Canada, with principal office address at c/o Patterson Palmer Law, Suite 1500, One Brunswick Square, Saint John, N.B. E2L 4H8, Canada. Whereas Roche BV is a corporation duly organized and existing under the laws of the Netherlands, with principal office address at Beneluxlaan 2A, GR Woerden, 3446, the Netherlands. As of December 18, 2006, CMTC is the owner of 30% of the outstanding capital stock of RPI, or Six Million (6,000,000) shares of RPI with par value of Ten Pesos (P10.00) per share while SAPAC is the owner of 20% of the outstanding capital of RPI, owning Three Million Nine Hundred Ninety Nine Thousand Nine Hundred Ninety Five (3,999,995) shares with a par value of Ten Pesos (P10.00) per share and legal ownership of five (5) shares held in trust individually by nominee stockholders of RPI. Roche BV, is the owner of 50% of the outstanding capital stock of RPI, or Ten Million (10,000,000) shares with par value of Ten Pesos (P10.00) per share. The present shareholding structure of RPI, namely CMTC and SAPAC, was a product of the international tensions between the two world wars; that as the consequence of said world wars, the Roche Group of Companies decided that corporations located outside the continental Europe shall be transferred to the holding company SAPAC or partly to a subsidiary of SAPAC. Thereafter, SAPAC became then a sister company of Roche Basel and the Roche Group Companies changed from a single holding Group to a twin shareholder structure from 1926 to 1989. In 1988, the Roche Group of Companies started a worldwide corporate restructuring to once again revert the Roche Group of Companies to a single holding structure with only one top holding company, Roche Holding Ltd., thereby commencing the step by step corporate objective for SAPAC to cease serving as a holding company. During this worldwide corporate reorganization, among others, the Far East affiliates were transferred, one after the other, from SAPAC to Roche BV. Roche BV was designated to basically hold all the affiliates in the Far East region, which includes RPI. The Roche Group of Companies has more recently (beginning 2004) also started to consolidate its worldwide treasury activities into Roche BV as the group's centralized treasury function, providing cash management and foreign exchange services to their affiliates, which is supported by the above mentioned legal reorganization. As part of this worldwide corporate reorganization of the Roche Group of Companies, CMTC, as owner of the 6,000,000 RPI shares, and SAPAC, as owner of the 4,000,000 RPI shares, assigned said shares to Roche BV. The said assignments were made pursuant to a Deed of Assignment that the parties executed on December 18, 2006. The execution of the Deed of Assignment was made without payment of any monetary consideration and pursuant to the worldwide corporate reorganization of the Roche Group of Companies. Prior to and after the assignments, without consideration, of RPI shares from CMTC and SAPAC to Roche BV, pursuant to the worldwide corporate reorganization, the ultimate parent corporation of RPI is Roche Holding Ltd. and the beneficial ownership of such RPI shares remains with the Roche Group of Companies. In reply, please be informed as follows: 1. The assignment by CMTC and SAPAC of their RPI shares to Roche BV without consideration and pursuant to a legitimate worldwide corporate reorganization is not subject to capital gains tax. There is no gain or loss recognized on the part of both the transferors and transferee on the assignments by CMTC and SAPAC of their RPI shares to Roche BV without consideration and pursuant to a legitimate worldwide corporate reorganization. In numerous ruling issued by this Office, we ruled that in a transfer of shares of stock of a Philippine company by a non-resident foreign corporation to another non-resident foreign corporation belonging to the same group of companies, said transfer being made pursuant to a legitimate worldwide corporate reorganization, there is no effective transfer of beneficial ownership of the said shares in the Philippine company. There being no transfer of beneficial ownership, no gain will be realized by both the transferor and transferee from the transfer of shares. Consequently the transfer is not subject to capital gains tax (BIR Rulings No. DA-088-06 dated March 6, 2006; DA-209-05 dated April 27, 2005; DA-524-05 dated December 29, 2005; DA-500-03 dated December 11, 2003; DA-144-03 dated May 5, 2003; DA-130-03 dated April 25, 2003; DA-085-97 dated March 4, 1997; 347-87 dated November 5, 1987; 161-83 dated September 1983). Considering that the transfer of RPI shares from CMTC and SAPAC to Roche BV is made pursuant to a legitimate worldwide corporate reorganization and considering further that RPI, CMTC, SAPAC and Roche BV all belong to the Roche Group of Companies, the beneficial ownership of the RPI shares will remain with the Roche Group of Companies. There is no effective transfer of beneficial ownership that took place and no gain is realized by both the transferors and transferee for income tax purposes. 2. The assignment by CMTC and SAPAC of their RPI shares to Roche BV without consideration and pursuant to a legitimate worldwide corporate reorganization is not subject to donor's tax. This Office has consistently ruled that the transfer of property, without consideration, and primarily made for business considerations is not subject to donor's tax under Section 98 of the Tax Code, as amended, because under such circumstances, no donative intent can be attributed to the transferor (BIR Ruling Nos. DA-088-06 dated March 6, 2006 DA-524-05 dated December 29, 2005; and DA-136-05 dated April 7, 2005; DA-028-05 dated January 24, 2005; DA-174-98 dated April 30, 1998). The assignment of the RPI shares was made primarily for business considerations, i.e., in connection with a worldwide corporate reorganization and to consolidate beneficial and legal ownership into the Transferee. Thus, the assignment of RPI shares by CMTC and SAPAC to Roche BV made without consideration is not subject to donor's tax since there is no donative intent that can be attributed to the Transferor. 3. The assignment of RPI shares by CMTC and SAPAC to Roche BV is not a disposition or exchange of properties or sale of services in the course of trade or business and is, therefore, not subject to VAT. Under Section 105 of the NIRC, VAT is imposed on, or among others, the sale, barter or exchange of properties, or the sale of services, in the course of trade or business. The phrase "in the course of trade or business" is defined as "the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity." Based on the foregoing definition, the assignments of RPI shares by CMTC and SAPAC to Roche BV is not a disposition or exchange of properties "in the course of trade or business". The RPI shares assigned by CMTC and SAPAC to RPI were not held by CMTC and SAPAC for sale in the ordinary course of trade or business. Thus, the assignment of RPI shares by CMTC and SAPAC to Roche BV is not subject to VAT. 4. The assignment of RPI shares by CMTC and SAPAC to Roche BV, without consideration and pursuant to a legitimate worldwide reorganization, is subject to the documentary stamp tax (DST) imposed under Section 176 of the Tax Code of 1997, as amended. The assignment of RPI shares from CMTC and SAPAC to Roche BV is subject to DST. This Office held in BIR Ruling No. DA-475-05 dated November 21, 2005 that under Section 4 of Revenue Regulations No. 13-2004, implementing Section 176 of the Tax Code of 1997, as amended, all transfer of shares of stocks of a domestic corporation are subject to DST upon execution of the deed transferring ownership or rights thereto, or upon delivery, assignment or indorsement of such shares in favor of another. No transfer of shares of stock shall be recorded unless DST thereon has been duly paid for in accordance with Section 201 of the same Tax Code. 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 the ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service