BIR Ruling [DA-212-05]

April 27, 2005 BIR RULING [DA-212-05] Sec. 50, RR No. 2; DA-511-03 Siguion Reyna Montecillo & Ongsiangko 4th & 6th Floors, Citibank Center 8741 Paseo de Roxas, Makati City Attention: Attys. Jose Lis C. Leagogo, Leonardo Siguion Reyna, Jr. Nicanor N. Padilla & Ajee A. Tiu-Co Gentlemen : This refers to your letter dated April 8, 2005 requesting in behalf of your client, Tuls Industries, Inc. (hereinafter referred to as " Tuls "), for a ruling confirming your opinion that the conversion of debt to equity in the form of additional paid-in capital or paid-in surplus for which no shares of stock will be issued is not subject to income tax or donor's tax. It is represented that Tuls , formerly known as Electrolux Industrial, Inc., is a corporation organized and existing under Philippine Laws, primarily engaged in the manufacturing of goods, wares and merchandise; the marketing or general merchandising on a wholesale, basis of goods, wares, merchandise, products of all kinds; and for this purpose, to carry on the business of manufacturers, importers and exporters as principals, factors, representatives, agents or commission merchants in respect of manufacturing, buying, selling, trading or dealing in any and all kinds of goods and wares, including, but not limited to goods, wares and merchandise manufactured, sold or traded by ABE. ABE Electrolux Sweden (hereafter referred to as "ABE") is a non-resident corporation organized and existing under the laws of Sweden and at present, it owns 60,000 shares of stock in Tuls . As of March 2005, Tuls has long term liability (hereafter referred to as "Debt") to ABE in the amount of Php22,788,135.00; that ABE has proposed to convert the Debt into equity in Tuls in the form of additional paid-in capital or paid-in surplus for which no shares of stock will be issued. In reply please be informed that your above opinion is hereby confirmed. The conversion of debt to equity for future capital is not subject to income or donor's tax. Unlike forgiveness or condonation of a debt by the creditor/stockholder, which is subject to either income or donor's tax, the conversion of debt to equity is not subject to either donor's tax or income tax. In BIR Ruling DA-511-03 dated December 18, 2003, the BIR opined that the conversion of the loan into paid-in surplus without the corresponding issuance of additional shares is not subject to either income tax or donor's tax. It is noted herein that the issue in the instant case is almost identical with the issue in the above ruling, thus, the above opinion of this Office can be made applicable to the instant case. Accordingly, the conversion of debt to equity without the corresponding issuance of shares of stock by Tuls is a capital transaction not subject to either donor's tax or income tax. ECHSDc 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 and Inspection Group