BIR Ruling [DA-318-03]

September 26, 2003 BIR RULING [DA-318-03] Secs. 24, 27 & 175; RR No. 26 BIR Ruling No. 171-92 De Borja Medialdea Bello Guevarra & Gerodias 21st Floor Wynsum Corporate Plaza Emerald Avenue, Ortigas Center, Pasig City Attention: Atty. Pablo A. De Borja Gentlemen : This refers to your letter dated July 16, 2003 requesting for advice on the tax consequences of a proposed reduction of the authorized capital stock of a corporation by way of cancellation of the entire unpaid portion of stockholders' subscriptions. The facts of the case, as quoted from your letter, are as follows: "...Bistro Americano (Alabang) Corporation ("Corporation"),was incorporated with an authorized capital stock of P40,000,000.00, of which the amount of P10,000,000.00 was subscribed by its stockholders. Of the amount subscribed, the amount of P2,500,000.00 has been paid by the stockholders. There has been no call made by the Board for payment by the stockholders of the unpaid portion of their subscriptions. As the Corporation is perceived to be presently overcapitalized and would not require any further capital infusion to sustain profitable operations, the Corporation is proposing to reduce its capital by cancelling the entire unpaid portion of stockholder subscriptions amounting to P7,500,000.00." In reply, please be informed as follows: 1. As a result of the reduction of the subscribed capital stock of Bistro Americano (Alabang) Corporation (Bistro for brevity) from P10,000,000.00 to P2,500,000.00 only, the entire unpaid portion of its stockholders' subscriptions shall be cancelled. Consequently, its stockholders will surrender their respected shares to the corporation. The surrender by the stockholders of their respective shares to Bistro and the eventual cancellation of these shares will not be subject to any tax. The surrender of the shares by the stockholders to Bistro will not effectively transfer ownership of the said shares to the latter. Neither will Bistro receive value for the surrender of said shares, for the same is done only in order to implement the reduction of the capital stock. Further, the shares to be surrendered will not represent any value since these shares will become a mere documentary evidence of the reduced capital stock and will cease to exist after cancellation. (BIR Ruling No. 171-92 dated May 28, 1992) TSEHcA 2. The issuance of new certificates of stock to the respective stockholders as replacement to their original subscriptions and which will represent their adjusted or reduced subscriptions to Bistro will not be subject to the documentary stamp tax imposed under Section 175 of the Tax Code of 1997. Section 13 of the Documentary Stamp Tax Regulations (Rev. Regs. No. 26) provides in part as follows: "SEC. 13. Certificates of stock issued to replace prior or original certificates. No documentary stamp tax is due upon certificates of stock issued to replace prior or original certificates, provided the new certificates are issued to the same person, ...." Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group