Sycip Gorres Velayo & Co.

May 12, 2008 BIR RULING [DA-283-08] DA-254-2003 dtd. 8/5/03 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Veronica A. Santos Tax Division Gentlemen : This refers to your letter dated June 9, 2006, seeking confirmation that the transfer of shares of a domestic corporation from a trustee to the beneficial owner thereof is exempt from capital gains tax, documentary stamp tax, and donor's tax. FACTUAL BACKGROUND Dyno Nobel Philippines, Inc. ("DNPI") is a duly registered Philippine corporation organized and existing under and by virtue of the laws of the Philippines, with office and principal place of business at Barangay Bontis, Bacong, Negros Oriental. Dyno Nobel Asia Pacific Limited ("DNAP"), on the other hand, is a non-resident foreign corporation organized and existing under the laws of Australia. It is not registered either as a corporation/partnership licensed to do business in the Philippines. DNPI is engaged in the manufacture of ammonium nitrate. DNPI is duly registered with the Board of Investments ("BOI") in accordance with the Omnibus Investments Code of 1987, under Certificate of Registration No. 77-516, dated May 26, 1977. The BOI has authorized DNPI to exceed the forty percent (40%) foreign ownership limitation for manufacturers of ammonium nitrate under the Foreign Investments Negative List pursuant to Section 19 (a) (3) of Republic Act No. 5186. Consequently, DNAP holds seventy six percent (76%) of the total outstanding capital stock. Nevertheless, the assets of DNPI do not consist wholly or principally of direct interest in or over land in the Philippines, or of rights to exploit, or to explore for, natural resources in the Philippines, so as not to violate Constitutional limitations on foreign corporations with respect to ownership of land. STIEHc One of the stockholders of record of DNPI is Mr. Alonzo Q. Ancheta. Mr. Ancheta is a Filipino citizen and the stockholder of record of Two Hundred Thirty One Thousand Two Hundred Forty (231,240) shares of stock. Mr. Ancheta holds the said 231,240 shares of stock in DNPI in his name as trustee for DNAP pursuant to a Declaration of Trust executed in Makati City, Philippines and dated January 10, 2000. The Declaration of Trust shall be revoked upon the death of the trustee or at the instance of DNAP. As part of its global corporate restructuring and to consolidate its shareholdings, DNAP has revoked the Declaration of Trust in favor of Mr. Ancheta. As a result, the DNPI shares held by Mr. Ancheta in trust for DNAP will be transferred back to DNAP without any consideration pursuant to a Revocation of Trust executed in Melbourne, Australia and Makati City, Philippines, both dated February 10, 2006. The request is posed in view of the transfer to DNAP of the DNPI Shares held by Mr. Ancheta as trustee of DNAP, without any consideration. Several BIR Rulings have held that a transfer of shares from the trustees to the trustors, without consideration and by virtue of Deeds of Trust and Assignment, is not subject to capital gains tax, documentary stamp tax or donor's tax. In addition, the Corporate Secretary of DNPI can record the transfer of the DNPI shares from Mr. Ancheta to DNAP in the Stock and Transfer Books of DNPI, and after cancellation of the stock certificates issued in the name of Mr. Ancheta, issue new stock certificates in the name of DNAP as transferee, only upon presentation of the ruling to be issued by the BIR. Hence, this request. BIR REPLY We reply as follows: 1. The transfer of DNPI shares is exempt from Capital Gains Tax Under Section 24 (C) of the Tax Code, as amended, capital gains presumed to have been realized from the sale, exchange or disposition of shares of stock in any domestic corporation shall be subject to a final tax at the rates of 5% and 10%. SaETCI SEC. 24. (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. The provisions of Section 39 (B) notwithstanding, 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% However, in BIR Ruling DA-254-03 dated August 5, 2003, the BIR held that "the transfer of shares from the trustees to the trustors, the real owners therefor, without monetary consideration and by virtue of the Deeds of Trust and Assignment, is not subject to the capital gains tax" since there is no sale, barter or exchange of shares of stock to speak of. Similarly, BIR Ruling No. 031-99 (dated March 19, 1999) held that "the conveyance by the Trustee in favor of the Trustor of the subject properties which the former acquired by virtue of the trust agreement is not to be treated as another transfer separate and distinct from the sale between the original owner and the trustee. The conveyance is merely to be treated as a continuation and confirmation of title in favor of the ultimate and real beneficiary of the subject properties". These have been repeatedly held by this Office in several rulings, the most recent of which are: (1) BIR Ruling No. DA-367-03 dated October 14, 2003; (2) BIR Ruling No. 365-03 dated December 13, 2003; and (3) BIR Ruling No. DA-080-02 dated April 19, 2002 . Thus, the transfer to DNAP of DNPI shares held by Mr. Ancheta in trust for DNAP is not subject to capital gains tax. 2. The transfer of DNPI shares is exempt from Documentary Stamp Tax Under Section 175 of the Tax Code, as amended by Republic Act No. 9243, the transfer of shares of stock is subject to documentary stamp tax. SEC. 175. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Shares or Certificates of Stock. On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such stock, or to secure the future payment of money, or for the future transfer of any stock, there shall be collected a documentary stamp tax of Seventy-five-centavos (P0.75) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such stock: Provided, That only one tax shall be collected on each sale or transfer of stock from one person to another, regardless of whether or not a certificate of stock is issued, indorsed, or delivered in pursuance of such sale or transfer: and Provided, further, That in the case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of said stock. IDESTH However, BIR Ruling No. 031-99 dated March 19, 1999 provides that the Deeds of Trust and Assignment, pursuant to which the trustors instructed the trustees to transfer the shares in the name of the trustors, are not subject to the documentary stamp tax imposed under Section 176 of the Tax Code, but only to the documentary stamp tax on certificates under Section 188 of the same Code. This has been repeatedly held by the BIR in several subsequent rulings: (1) BIR Ruling No. DA-080-02 dated April 29, 2002; (2) BIR Ruling No. DA-254-03 dated August 5, 2003; (3) BIR Ruling No. DA-365-03 dated October 13, 2003; and (4) BIR Ruling No. DA-367-03 dated October 14, 2003. Thus, the transfer to DNAP of DNPI shares held by Mr. Ancheta in trust for DNAP is not subject to the documentary stamp tax under Section 176 of the Tax Code. 3. Transfer of DNPI shares is exempt from Donor's Tax The transfer to DNAP of DNPI shares held by Mr. Ancheta in trust for DNAP is likewise not subject to donor's tax. In BIR Ruling No. DA-254-03 dated August 5, 2003, the BIR held that the conveyance of shares of stock from the trustee to the beneficial owner is not subject to donor's tax imposed under Section 98 of the Tax Code, due to lack of donative intent. Likewise, BIR Ruling No. DA-367-03 dated October 14, 2003 states that the transfer by the nominee to the true, actual and beneficial owner of the shares, is not subject to donor's tax since it pertains to the transfer from the trustee/nominee to the real owner. 4. The registration of transfer of DNPI Shares Under Revenue Regulations No. 2-82, as amended, the transfer of shares of stock can be recorded in the Stock and Transfer Book of a corporation only upon showing of proof of payment of taxes. SEC. 8. Effect of Non-payment of Tax. No sale, exchange, transfer or similar transaction intended to convey ownership of, or title to any share of stock shall be registered in the books of the corporation unless the receipt of payment of the tax herein imposed is filed with and recorded by the stock transfer agent or secretary of the corporation. It shall be duty of the aforesaid persons to inform the Bureau of Internal Revenue in case of non-payment of tax. HCDAac Since there is no capital gains tax and documentary stamp tax due on the transfer of DNPI Shares from Mr. Ancheta to DNAP, no tax clearance certificate can be presented to the corporate secretary for the registration of the transfer of DNPI Shares. Nevertheless, in BIR Ruling No. 031-99 (dated March 19, 1999) and BIR Ruling [DA-254-03] (dated August 5, 2003), the BIR stated that the ruling issued by the BIR serves as authority for the Corporate Secretary to transfer the shares of stock transferred by the trustee to the beneficial owners thereof since said transfer is not subject to capital gains tax and documentary stamp tax, and hence, no tax clearance certificate can be presented to the corporate secretary for the registration of said shares. Thus, the DNPI Corporate Secretary can register the transfer of DNPI Shares from Mr. Ancheta to DNAP upon presentation of this ruling, and consequently, cancel the stock certificates in the name of Mr. Ancheta and issue new certificates of stock in the name of DNAP as transferee. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service