BIR Ruling [DA-233-04]

May 6, 2004 BIR RULING [DA-233-04] 038-89; DA 040-98 V.G. Roxas Company, Inc. Unit 7 ANPN Plaza Philippine Rabbit Compound 1240 EDSA, Balintawak Quezon City Attention: Ms. Ma. Cecilia R. Roxas Treasurer Gentlemen : This refers to your letter dated February 3, 2000 stating that V.G. Roxas Enterprises is a single proprietorship duly registered with the Department of Trade and Industry (DTI); that it is engaged in the business of General Merchandising; that as per financial statements for June 2000, its current assets is worth P21,392,471.74 and the real property consisting of land, property and equipment is worth P6,925,462.96; that on April 13, 2000, Mr. Vicente Gallo Roxas has organized a corporation duly registered with the Securities and Exchange Commission (SEC) under the name and style of V.G. Roxas Co., Inc., with principal office address at Unit 7 ANPN Plaza, Philippine Rabbit Compound, 1240 EDSA, Balintawak, Quezon City; that V.G. Roxas Co., Inc. is organized for the primary purpose, among others, to import, wholesale and retail of general merchandise of products on educational, technological and vocational training equipment, instructional engineering laboratory equipment, investigative laboratory instruments and apparatus, communication instruments, medical and dental equipment; that V.G. Roxas Co., Inc. has an authorized capital stock of Thirty Million Pesos (P30,000,000.00) divided into Three Million (3,000,000) shares with a par value of Ten Pesos (P10.00), that out of the said capital stocks, 750,000 have been subscribed and P1,875,000.00 had been paid-up; and that pursuant to the corporate reorganization and divisionalization of business interests, Mr. Vicente G. Roxas intends to transfer his interest in V.G. Roxas Enterprises, a single proprietorship, worth P28,317,934.70 to V.G. Roxas Co., Inc. as payment of his additional subscriptions of 2,250,000 shares of stock, as a result of the said transaction, Mr. Vicente G. Roxas will gain more than 51% control of the said corporation. In connection therewith, you now request confirmation of yours opinion that "1. No gain or loss shall be recognized on the proposed transfer by Mr. Vicente G. Roxas of his interest in V.G, Roxas Enterprises to V.G. Roxas Co., Inc., whereby Mr. Vicente G. Roxas will continue to own more than 51% of the said corporation pursuant to Section 40(C)(2) and (6)(c) of the Tax Code of 1997; and "2. The transfer of the assets by Mr. Vicente G. Roxas in V.G. Roxas Enterprises to V.G. Roxas Co., Inc. will not be subject to the value-added tax (VAT) pursuant to Section 4.100-5(b)(1) of Revenue Regulations No. 7-95, as amended, the said transfer being considered a transaction not subject to output tax under said Section." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Section 40(C)(2) and (6)(c) of the Tax Code of 1997 provides that no gain or loss shall be recognized if property is transferred to a corporation by a person, in exchange for stock in a corporation of which as a result of such exchange, said person, alone or together with others, not exceeding four persons, gains control of said corporation. The term "control" shall mean ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Since Section 40(C)(2) and (6)(c) of the said Code on the non-recognition of gains or loss applies to the aforementioned transfer and exchange, no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by Mr. Vicente G. Roxas of his interest in V.G. Roxas Enterprises, a single proprietorship, to V.G. Roxas Co., Inc., considering that as a consequence of the said transfer Mr. Vicente G. Roxas shall gain control of V.G. Co., Inc. Furthermore, considering that the transfer by Mr. Vicente G. Roxas of his interest in V.G. Roxas Enterprise to V.G. Roxas Co., Inc. is without monetary consideration and there is no transfer of beneficial ownership, the same shall not be subject to income tax. ( BIR Ruling No. 038-89 dated March 20, 1989 ) Moreover, V.G. Roxas Co., Inc. will not be subject to income tax on the excess of the historical cost over the subscription payable, which V.G. Roxas Co., Inc. will book as paid in surplus. ( Sec. 55, Income Tax Regulations ) It shall not be subject to donor's tax imposed under Section 98 of the Tax Code of 1997. 2. Section 4.100-5(b)(1) of Revenue Regulations No. 7-95, as amended, provides that a change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders shall not be subject to output tax. Example: transfer of property to a corporation in exchange for its shares of stock under Section 34(c)(2) and (6)(c) of the Code. Consequently, the transfer of the Current Assets and properties in V.G. Roxas Enterprises by Mr. Vicente G. Roxas to V.G. Roxas Co., Inc. will not be subject to value-added tax ( DA040-98 dated February 05, 1998 ) 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service