BIR Ruling [DA-270-05]

June 21, 2005 BIR RULING [DA-270-05] DA 042-03 The Bengzon Law Firm 9th Floor, Ayala Life-FGU Center 6811 Ayala Avenue 1226 Makati City Attention: Attys. Ma. Romela M. Bengzon and Manolito S. Soller Gentlemen : This refers to your letter dated December 17, 2004 stating that your client, Bertelsmann Music Group GmbH is a foreign company incorporated and existing in accordance with German Law, with principal office at Carl-Bertelsmann-StraBe 270, D-33311 Gutersloh, Germany and filed at the Trade Register of Gutersloh, Germany under No. HRB-2867, that JKL Beteiligungs GmbH is also a foreign corporation organized and existing under German Law, with registered office at 33311 Gutersloh, Germany, Carl-Bertelsmann-StraBe 270 and filed at the Trade Register of Gutersloh, Germany under No. HRB-4333; that on September 23, 2004, a Deed of Exchange was executed in Gutersloh, Germany between Bertelsmann Music Group GmbH and JKL Beteiligungs GmbH for the transfer of Six Million (6,000,000) class A shares and Five Million Nine Hundred Ninety-Nine Thousand Nine Hundred and Ninety Six (5,999,996) class B shares of BMG Records (Pilipinas),Inc.;that BMG Records (Pilipinas),Inc. is a corporation duly organized and registered under the laws of the Philippines under Securities and Exchange Commission (SEC) Registration No. 172988, with principal office address at 3rd Floor Equitable PCI Bank Building, 898 Aurora Boulevard corner Stanford Street, Cubao, Quezon City; that the Deed of Exchange was authenticated by Edgar Tomas Q. Auxilian, Consul, Embassy of the Philippines, Bonn, Germany on October 11, 2004; that on November 4, 2004, the corresponding documentary stamp tax due on the said exchange was paid in the amount of P44,999.99; and that the above-mentioned transfer was conducted as a preliminary step towards the eventual merger of BMG Records (Pilipinas) Inc. and Sony Music Entertainment (Philippines),Inc. into Sony-BMG Music Entertainment (Philippines),Inc. as part of the global corporate merger of Bertelsmann Music Group and Sony Music Entertainment. In connection therewith, you now request confirmation of your opinion that the Deed of Exchange executed on September 23, 2004 by Bertelsmann Music Group GmbH for the transfer of its 6,000,000 class A shares and 5,999,996 class B shares of BMG Records (Pilipinas),Inc. in favor of JKL Beteiligungs GmbH is exempt from the payment of capital gains tax. In reply thereto, please be informed that Section 28(B)(5)(c) of the Tax Code of 1997 provides as follows: "(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: "Not over P100,000 5% "On any amount in excess of P100,000 10% On the other hand, Section 42(E), supra provides that ...gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. Be that as it may, it is clear that the transfer of the 6,000,000 Class A shares and 5,999,996 Class B shares of BMG in the name of Bertelsmann Music Group GmbH to JKL Beteiligungs GmbH in exchange for the issuance of one (1) shares of stock with a par value of five hundred euros (EUR 500) out of the latter's unissued capital stock pursuant to a global corporate restructuring is not subject to the capital gains tax imposed in Section 28(B)(5)(c) of the Tax Code of 1997 inasmuch as the transfer is merely a realignment of stock holdings, hence no gain is realized from such transaction. ( BIR Ruling No. 042-03 dated February 18, 2003 ) ACTaDH However, the transfer of the 6,000,000 Class A shares and 5,999,996 Class B shares of BMG in the name of Bertelsmann Music Group GmbH to JKL Beteiligungs GmbH is subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997, as amended by R.A. No. 9243, as implemented by Revenue Regulations No. 13-2004, at the rate of (P0.75) on each Two hundred pesos, or fractional part thereof, of the par value of such stock. IN VIEW OF THE FOREGOING, this Office holds that the transfer of the aforesaid shares from Bertelsmann Music Group GmbH to JKL Beteiligungs GmbH pursuant to its corporate restructuring is not subject to the final tax imposed under Section 28(B)(5)(c) in relation to Section 42(E) of the Tax Code of 1997. However, it is nevertheless subject to the documentary stamp tax imposed at the rate of P0.75 for every P200, or fractional part thereof, of the par value of such stock. 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 & Inspection Group