BIR Ruling [DA-360-03]

October 10, 2003 BIR RULING [DA-360-03] 29; 025-2002, DA-203-2002, 039-02 Atty. Maria Elena C. Ramiro 2423 Zamora St., Pasay City M a d a m : This refers to your letter dated June 10, 2002 stating that your client, Heirs of Alex & Engracia Reyes Sr., Inc. is a corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 122639, that its primary purpose is: "To undertake or participate in, subject to such terms and conditions as the corporation may deem fit, the management, operation, undertaking and/or rehabilitation of the business, industry or enterprise and/or act as financial or management consultant or adviser of any person, partnership, firm, association or corporation . . . , and to purchase, own, hold, sell and otherwise acquire and dispose of the capital stock or certificate of interest or participation in the said businesses and enterprises, subscription to their stock investment contracts, . . . and any securities of whatever kind and classification, mortgage, pledges, assignment of rights and properties, warehouse receipts, bills of lading and any commercial documents representing the ownership of or other rights or properties."; that as such, the company derives income in terms of royalties from corporations and other business entities, which royalties have already been subjected to a final tax; that in addition, the company intends to invest in existing corporations and expects to derive dividends therefrom; and for that purpose, it is considering a capital expansion program. Based on the foregoing representation, you now request for a confirmation of your opinion that: "(1) A corporation with more than twenty (20) stockholders is exempt from the imposition of the improperly accumulated earnings tax. under Section 29(B)(2)(a) of the National Internal Revenue Code (NIRC); "(2) The dividends the Company acquires from corporations of which it is a stockholder is exempt from dividends tax under Sec. 27(D)(4) of the NIRC. "(3) Royalties and dividends received by the Company are excluded from all other income of the Company which shall be subject to income tax. In other words, said royalty and dividend income shall no longer be subjected to corporate income tax or any other taxes for that matter." In reply, please be informed that Section 4 of Revenue Regulations No. 2-2001 implementing Section 29 of the Tax Code of 1997 on Improperly Accumulated Earnings Tax provides, viz. : ". . . closely-held corporations are those corporations at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held corporations. For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is based on stock ownership, the following rules shall be applied: (1) Stock Not Owned by Individuals. Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries. . . ." CcTIAH Improperly accumulated earnings tax, however, shall not apply to publicly-held corporations pursuant to Section 29 of the Tax Code of 1997. The ownership of a domestic corporation for purposes of determining whether it is a closely-held corporation or a publicly-held corporation is ultimately traced to the individual shareholders of the parent company. Thus, when at least 50% of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by more than 20 individuals, the corporation is considered a publicly-held corporation. Ultimately, the question of whether the Heirs of Alex & Engracia Reyes Sr., Inc. is a publicly-held corporation, depends on whether at least 50% of said corporation is owned by more than 20 individuals. This is a question of fact, which is not a proper subject of a legal ruling. The proper function of a ruling is to interpret the tax laws and not to determine questions of fact. Accordingly, if the Heirs of Alex & Engracia Reyes Sr., Inc. can show that it is a publicly-held corporation, it will not be subject to the improperly accumulated earnings tax. On the other hand, dividends received by a domestic corporation from another domestic corporation shall not be subject to tax pursuant to Section 27(D)(4) of the Tax Code of 1997. However, pursuant to Section 27(D)(1) of the Tax Code of 1997, a final tax at the rate of twenty percent (20%) is imposed on royalties derived from sources within the Philippines. 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. cDAEIH Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group