Tan & Concepcion Law Offices

June 22, 2007 BIR RULING [DA-345-07] 40 (C) (2) (c); No. 024-2005 Tan & Concepcion Law Offices Suites 1501-1502, The Orient Square Building F. Ortigas, Jr., Ortigas Center, 1661 Pasig City Attention: Atty. Fe L. Concepcion Counsel Gentlemen : This refers to your letter dated May 31, 2007 requesting on behalf of your client, Mrs. Sergia B. Estrella, proprietor of Rosales Ice Plant in Rosales, Pangasinan, for confirmation of your opinion that the proposed transfer by Mrs. Estrella of the assets of Rosales Ice Plant classified as fixed assets in exchange for the shares of stock of Conserbest Ice Manufacturing, Inc. is not subject to the 12% VAT. It is represented that Mrs. Estrella intends to transfer the assets of her business consisting of land, buildings and other improvements, ice making plant, (compressors, oil separator, oil cooler, oil pump, roots blower, brine agitator, water pump, condensers, receivers, brine tanks, etc.), machine shop equipment (lathe machine, bench lathe machine, shaper, milling machine, shearing machine), electrical utilities (generator sets, power substation, cooling tower, etc. [collectively, "Fixed Assets"], office furniture and fixtures, delivery trucks, and other office machinery and equipment, to a proposed corporation, ("Conserbest Ice Manufacturing, Inc.") in exchange for shares of stock therein pursuant to the tax-free provision of the Tax Code. AHacIS In reply thereto, please be informed that the transfer by Mrs. Estrella of the Fixed Assets of Rosales Ice Plant to Conserbest Ice Manufacturing, Inc., in exchange for the latter's shares of stock under Section 40 (C) (2) of the Tax Code of 1997 does not constitute a sale or exchange that is subject to VAT but a mere change in the form of ownership. This is fortified in the case of Delpher Trades Corporation vs. Intermediate Appellate Court , 157 SCRA 349 (1988), where the Supreme Court held that the transfer of properties to a corporation in exchange for shares of stock of the corporation pursuant to Section 35 (c) (2) of the NIRC, as amended, where the transferor gains control of the said corporation does not constitute a sale of properties. The transaction merely involves a change in the nature of the ownership of properties from unincorporated to incorporated. Ownership over the properties remains the same. (BIR Ruling No. 024-2005 dated December 23, 2005) Furthermore, Section 105 of the Tax Code of 1997, as amended by R.A. 9337, identifies the persons liable for the Value-Added-Tax. Thus, "SEC. 105. Persons Liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added-tax (VAT) imposed in Sections 106 to 108 of this Code. xxx xxx xxx." However, Section 4.106-8 (b) (1) of Revenue Regulations (RR) No. 16-2005 specifically excludes transfer of properties in exchange for shares of stock resulting to a change of control of the transferee corporation, from being subject to output tax. Hence, cSCTID "SEC. 4.106-8. Change or Cessation of Status as VAT-registered Person. xxx xxx xxx (b) Not subject to output tax . The VAT shall not apply to goods or properties existing as of the occurrence of the following: (1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders. The goods or properties used in business or those comprising the stock-in-trade of the corporation, having a change in corporate control, will not be considered sold, bartered or exchanged despite the change in the ownership interest in the said corporation. (2) . . . (3) . . . Therefore, the proposed transfer by Mrs. Estrella of the assets of Rosales Ice Plant classified as fixed assets (consisting of land, buildings, improvements and machineries) in exchange for the shares of stock of Conserbest Ice Manufacturing, Inc. shall not be subject to value-added-tax, pursuant to Section 4.106-8 (b) (1) of RR No. 16-2005, otherwise known as the "Consolidated Value-Added-Tax Regulations of 2005", the said transfer being considered a transaction "not subject to output tax" under the said Section. 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. AcTHCE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service