BIR Ruling [DA-317-03]

September 26, 2003 BIR RULING [DA-317-03] 28 (B) (5) (e) DA 053-02 Picazo Buyco Tan Fider & Santos 18th, 19th & 17th Floors, Liberty Center 104 H.V. dela Costa Street Salcedo Village, Makati City Attention: Atty. Mark O. Vergara and Atty. Rosalia S. Bartolome-Alejo Gentlemen : This refers to your letter dated May 2, 2003 stating that your client, BNP Prime Peregrine Holdings, Ltd. (HLL) is a corporation organized and existing under the laws of Malaysia; that HLL is an investment holding company and is a wholly-owned subsidiary of BNP Equities Asia Ltd. (BNPEAL), also a corporation organized and existing under the laws of Malaysia; that there is a proposal for the winding up and dissolution of HLL; and that among the assets of HLL which shall be distributed in the form of liquidating dividends to its sole stockholder, BNPEAL, are shares of stock in BNP Paribas Peregrine Securities, Inc. (BNPPS), a corporation organized under Philippine laws. In connection therewith, you now request confirmation of your opinion that "1. The transfer of BNPPS shares from HLL to BNPEAL in the form of liquidating dividends is not subject to capital gains tax since there is no sale, barter or exchange of shares. The transfer of BNPPS shares is only a consequence of the winding up and dissolution of HLL; and "2. However, the transfer of shares in the form of liquidating dividends is subject to documentary stamp tax imposed under Section 176 of the NIRC at the rate of P1.50 for every P200.00 or fractional part thereof, of the par value of the shares sought to be transferred." EaIDAT In reply thereto, please be informed that your opinion is hereby confirmed as follows: (1) The transfer of all the shares of stock of HLL in BNPPS to BNPEAL is not a taxable event in the Philippines. This Office in BIR Ruling No. DA008-2001 dated January 30, 2001 has already ruled that a liquidating corporation does not realize gain or loss in the distribution of its remaining assets to its shareholders as a consequence of its liquidation. The transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale of these assets. (BIR Ruling No. 171-92 dated May 28, 1992) Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. (W.P. Fox & Sons, Inc. v. Commissioner of Internal Revenue, 15 BTA 115; Jordan Petroleum Corporation, 13 AFTR 2d 1692, JRS Brown & Son Company, v. Commissioner of Internal Revenue, 10 TC 840) . Accordingly, the transfer by HLL, the liquidating corporation, of its shares of stock in BNPPS to BNPEAL is not considered a sale of these assets. Consequently, such transfer is not subject to the 5%/10% capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997. However, the shareholder of HLL (the corporation being liquidated) will realize a capital gain or loss on its receipt of the liquidating dividends consisting of the shares. The transfer of shares by a stockholder to a corporation under liquidation in exchange for assets of the liquidated corporation is considered a sale (Wise & Co. vs. Meer, 78 Phils, 655 [1947]) . The gain consists of the difference between the fair market value of the liquidating dividends and the acquisition cost or adjusted cost to HLL of its shareholdings in BNPPS. Any gains realized by the stockholder upon the liquidation of HLL is not subject to Philippine tax since the same will be realized by the stockholder, a non-resident corporation, as a consequence of the sale (surrender of shares in liquidation) of its shares of stock in BNPEAL, another non-resident foreign corporation. Such gains would not have been realized from Philippine sources. (2) Finally, the transfer of the BNPPS shares from HLL to BNPEAL is subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997 at the rate of P1.50 for every P200.00 or fractional part thereof, of the par value of the shares transferred. Accordingly, upon proof of payment of the documentary stamp tax, the Corporate Secretary of BNPPS may now register the transfer of the shares from LL to BNPEAL in the Stock and Transfer Book of the aforesaid corporation and cancel and issue new stock certificates in the name of the transferee corporation. 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. aEcTDI Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group