SGV & Co.

April 13, 2007 BIR RULING [DA-224-07] APIC RR 2; 174; DA-432-05; DA-560-04; DA-046-04 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Wilfredo U. Villanueva Principal, Tax Services Gentlemen : This refers to your letter dated July 20, 2006 requesting confirmation of your opinion that the infusion by New Asia B.V.("NABV") of additional paid-in capital ("APIC") into Unilever Philippines, Inc. ("ULP"), in the amount of Thirty-Five Million Euros (EU35,000,000.00) equivalent to US$47,000,000.00, without the issuance of additional shares of stock, is deemed a capital investment, which is not included within the purview of the term "taxable income" under the Tax Code, and is not subject to income, donor's and documentary stamp taxes. It is represented that ULP is a corporation organized and existing under the laws of the Philippines with principal office address at 1351 United Nations Avenue, Manila, Philippines. It is primarily engaged in the business of manufacturing, processing, selling and dealing in foods of all kinds, soaps, detergents, washing powders, cleansing substances, perfumery and toilet requisites and preparations of all kinds. ULP has an authorized capital of 6,000,000 common shares of stock with a par value of Php50.00, out of which 4,918,523 shares have been subscribed and paid-up. ADHcTE On the other hand, NABV is a non-resident corporation organized and existing under the laws of The Netherlands with principal office address at Weena 455, 30113 AL Rotterdam (P.O. Box 760 Rotterdam) The Netherlands. NABV owns 99.99% of the shares of stocks of ULP. On June 6, 2006, the Board of Directors of ULP issued a Resolution calling for the infusion of additional capital by its lone corporate stockholder, NABV, in order to settle in part its long-term debt that financed the acquisition of its Foods business in 2004 and to augment the Company's working capital requirements so as to achieve its growth objectives. Pursuant to this cash call by ULP, NABV agreed to infuse additional cash in the amount of EU35,000,000.00, equivalent to US$47,000,000.00. This additional capital contribution by NABV to ULP will be recorded by ULP as Additional Paid-In Capital (APIC) in its books. Thus, the authorized capital stock ("ACS") of ULP would not be increased and neither would the Company issue additional shares of stock from the un-issued portion of its ACS. Accordingly, there will be no increase in the outstanding shares of stock held by NABV in ULP as a result of the former's payment of additional premium for shares already issued to it. The additional capital contribution will, however, increase the cost basis of NABV's shares in ULP. In reply, please be informed as follows: 1. Section 56 of Revenue Regulations ("RR") No. 2, otherwise known as the Income Tax Regulations, provides that voluntary payments by stockholders to the corporation, when credited to the corporation's surplus account or to its special capital account, is not considered income. Thus: "Contributions by shareholders. Where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary pro rata payments by its shareholders, the amounts so received being credited to its surplus account or to a special capital account, will not be considered income, although there is no increase in the outstanding shares of stock of the corporation . The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as part of the operating capital of the company." (Emphasis supplied) In several rulings of this Office, it has been consistently held that additional funds received by a corporation from shareholders in the form of APIC are not considered taxable income as defined under the 1997 Tax Code, as amended. This additional capital contribution without necessarily issuing additional shares of stock, merely increases the basis of the stockholder's stock but not their proportionate equity in the corporation. As such, it is a transaction not subject to income or gift taxes. (BIR Ruling Nos. DA-432-05 dated October 20, 2005; DA-560-04 dated November 8, 2004; DA-046-04 dated February 5, 2004; DA-117-03 dated April 14, 2003; DA-221-02 dated November 25, 2002; 127-89 dated June 13, 1989; 586-88 dated December 19, 1988; and 270-87 dated September 8, 1987) CSTDEH Accordingly, this Office confirms your opinion that the amount of EU35,000,000.00, equivalent to US$47,000,000.00 infused by NABV into ULP as APIC, without the issuance of shares of stock, does not constitute income on the part of ULP but is deemed a capital contribution not subject to income tax. 2. Since the capital infusion shall effect no change in the equity shareholdings of the stockholders of ULP and the transfer will merely increase the basis of the stockholders' stock but not their proportionate equity in the Company, this Office likewise confirms your opinion that the transaction is not subject to gift or donor's tax under Section 99 of the Tax Code (BIR Ruling Nos. DA-046-04 dated February 5, 2004; DA-560-04 dated November 8, 2004; DA-117-03 dated April 14, 2003). TICAcD Well-settled in our jurisprudence is the fact that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor, (2) the increase in the patrimony of the donee, and (3) the intent to do an act of liberality ( animus donandi ). As it was represented that there is no intent to donate on the part of NABV and that the said remittance by NABV to ULP is intended as additional capital contribution by the former effected for purely business reasons, the APIC is not subject to donor's tax (BIR Ruling Nos. DA-432-05 dated October 20, 2005; DA-001-03 dated January 7, 2003). 3. This Office has consistently held that the infusion of APIC which does not result in the issuance of shares of stock, shall not be subject to DST imposed under Section 174 of the Tax Code, as amended by R.A. No. 9243 ( BIR Ruling Nos. DA-432-05 dated October 20, 2005; DA-046-04 dated February 5, 2004; DA-139-04 dated March 26, 2004; DA-046-04 dated February 5, 2004; DA-221-02 dated November 25, 2002 ). Since additional cash contribution of NABV in ULP, in the form of APIC will not involve the issuance of shares of stock by ULP, this Office, thus, confirms your opinion that the cash contribution by NABV to ULP, is not subject to DST under Section 174 of the 1997 Tax Code, as amended. 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 Commissioner of Internal Revenue