BIR Ruling [DA-324-97]

September 24, 1997 BIR RULING [DA-324-97] Law Offices of Bautista Picazo Buyco Tan & Fider 8th Floor, Singapore Airlines Building 138 H. V. dela Costa Street Makati City Attention: Atty. Antonio A. Picazo Gentlemen : This refers to your letter dated March 25, 1997 requesting for a ruling on the tax consequence of the property dividend declaration of AB Capital and Investment Corporation (ABCIC) consisting of shares of stock of AsianBank Corporation (AsianBank). It is represented that ABCIC is a domestic corporation engaged in business as an investment house with a quasi-banking license; that it has an authorized capital stock of P500 million divided into 5,000,000 common shares of stock, all with a par value of P100 per share, of which 2,811,210 common shares of stock are issued and outstanding; that as of January 31, 1997, ABCIC's total stockholders' equity amounts to P658,562,374 which includes unrestricted retained earnings in the amount of P352,205,311; that on February 24, 1997, ABCIC declared P82,811,947 of its unrestricted retained earnings as of January 31, 1997 as dividends in favor of stockholders of record as of February 24, 1997; that said dividends will be distributed in the form of property dividends consisting of 383,382 AsianBank shares with a total book value of P82,811,947; that this declaration of property dividends is impelled by the following business considerations: 1) there is cross-ownership of the shares of ABCIC and AsianBank; and 2) aside from having common stockholders, ABCIC and AsianBank own shares of each other; that the AsianBank shares held by ABCIC are not needed in the operations of ABCIC; and that the declaration of the ABCIC held AsianBank shares as property dividends is a step towards accomplishing the twin objectives of: (a) eliminating the cross-ownership of the two entities; and (b) disposing idle assets of ABCIC. CDHSac Based on the foregoing, your now request confirmation that: "1. The declared property dividends consisting of AsianBank shares of stock will be recorded at their book value in the books of ABCIC, and the ABCIC stockholders receiving the same can record the dividend thus received at the book value reflected in the books of ABCIC. "2. The declared property dividends which shall be received by the stockholders shall be subject to a final withholding tax of zero percent (0%), and the receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of said shares of stock as property dividends. "3. ABCIC, as the corporation declaring the dividends, shall not be subject to any income or capital gains tax on the difference between the fair market value and the book value of the AsianBank shares of stock declared and distributed as property dividends. "4. The Deeds of Conveyance to be executed between ABCIC and its stockholders to effect the transfer of the AsianBank shares of stock declared as property dividends to ABCIC stockholders shall not be subject to the documentary stamp tax imposed under Section 176 of the NIRC as amended, considering that the transfer or conveyance of the shares of stock to the stockholders is not a sale or is without any monetary consideration (section 185, Revenue Regulations No. 26 as amended). However, the acknowledgment of the Deeds of conveyance before a notary public is subject to documentary stamp tax of P15 pursuant to Section 188 of the NIRC." In reply, please be informed that the property dividends shall be recorded at their book value in the books of both the issuing corporation and the recipient stockholder. The property dividends which shall be received by the individual stockholders of ABCIC shall be subject to a final withholding tax of zero percent (0%) and the receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of the said properties as property dividends. [Section 21 (c) (2) of the Tax Code, as amended by Executive Order No. 37] Moreover, ABCIC shall not be subject to any income or capital gains tax on the difference between the fair market value and the book value of the properties declared and distributed as property dividends. This is so because there is no realized gain if the value used at the time of distribution is the book value. aEcHCD On the other hand, the Deed of Conveyance to be executed between ABCIC and its stockholders to effect the transfer of the AsianBank shares of stock declared as property dividends, not being a sale and without monetary consideration shall not be subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended, but only to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code, as amended (BIR Ruling Nos. 108-93 dated March 16, 1993; 498-93 dated December 20, 1993; and 156-94 dated November 16, 1994). 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.) SIXTO S. ESQUIVIAS IV OIC-Assistant Commissioner (Legal Service)