BIR Ruling [DA-376-05]

September 1, 2005 BIR RULING [DA-376-05] RR 2; DA 221-02 SGV & Co . 6760 Ayala Avenue Makati City 1227 Attention: Mr . Joel L . Tan-Torres Partner, Tax Division Gentlemen : This refers to your letter dated April 23, 2004 requesting on behalf of your client, Rockwell Land Corporation (Rockwell Land), for confirmation of your opinion that the transaction between Rockwell Land and Rockwell Leisure Club, Inc. (RLCI) is not subject to the donor's tax under Section 98 of the Tax Code of 1997. cEAaIS It is represented that RLCI is a non-profit, stock corporation duly organized and existing under the laws of the Philippines; that its primary purpose is to operate the sports, recreational and leisure facilities for and on behalf of its shareholders; that it has an authorized capital stock of 3,000 shares, with a par value of Php1,000 per share, distributed as follows: Founder Shares 9 Ordinary Common Shares 1,491 Class A Common Shares 1,000 Class B Common Shares 500 Total Shares 3,000 ===== that Rockwell Land is a corporation duly organized and existing under the laws of the Philippines; that it is engaged in real estate development; that Rockwell Land is a shareholder of RLCI and its shareholdings are distributed as follows: Ordinary Common Shares subscribed and paid up 1,500 Class A Common Shares 600 Class B Common Shares 500 Total Shareholdings 2,600 ===== that one of the projects of Rockwell Land, currently under construction, is a real estate development project named Project Manansala which consists of a parcel of land and a building and the facilities for recreational functions, a badminton court and a gym with corresponding equipment (Club Facilities);that these Club Facilities will be completed at an estimated total construction cost of PhP37,600,000.00; that the Board of Directors of Rockwell Land approved the transfer at cost of the Club Facilities to RLCI as additional paid-in capital (APIC) contributed by Rockwell Land to RLCI; that as such, no additional common shares from the latter company will be issued to Rockwell Land; that the Board of Directors of Rockwell Land approved the transfer, having deemed it desirable and to the best interests of both the corporation and its shareholders for the following bona-fide business reasons: A. The transaction between the two corporations will result in a more productive use of the transferred facilities and efficiency of their operations as RLCI is primarily engaged in the management of such facilities and has the technical know-how to provide the services appurtenant to such facilities; and B. The transaction will bring about greater value to the facilities as well as to the shareholdings of Rockwell Land in RLCI. In reply, please be informed that Section 56 of Revenue Regulations No. 2 provides that where a corporation requires additional funds for conducting its business and obtains said funds through voluntary payments by its shareholders, the amounts so received being credited to its surplus account or to a special capital account, will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as part of the operating capital of the company. Corollarily, in BIR Ruling No. 586-88 dated December 19, 1988, this Office had the occasion to rule that the additional contribution in the form of donated surplus without the necessity of issuing additional shares of stock is deemed capital investment which is not included within the purview of the term "taxable income" and is not subject to income tax. In another occasion, this Office ruled that additional capital contribution without necessarily issuing additional shares of stock, which merely increase the basis of the stockholders' stock but not their proportionate equity in the corporation, is a transaction not subject to income or gift taxes. (BIR Ruling No. 270-87 dated September 8, 1987; 127-89 dated June 13, 1989) Accordingly, the infusion of the additional paid-in capital by Rockwell Land into RLCI is in the nature of additional funds which will be used as, and forms part of, the latter's working capital for which no corresponding shares of stock will be issued. As such, the additional paid-in capital does not constitute an income on the part of RLCI nor a donation on the part of Rockwell Land. 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.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue