BIR Ruling [DA-388-98]

August 25, 1998 BIR RULING [DA-388-98] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Gentlemen : This refers to your letter dated May 7, 1998 requesting for a ruling on the Philippine tax consequences of the merger of Alcorn Production Palawan, Inc. (Production) into Alcorn Palawan, Inc. (Palawan) and subsequently, the merger of Palawan into Alcorn (Philippines), Inc. (Alcorn Philippines) with Alcorn Philippines as the surviving corporation. LLcd It is represented that Production, Palawan and Alcorn Philippines are all corporations organized and existing under the laws of the State of Delaware, USA and duly licensed to do business in the Philippines through their respective Philippine branches; that Palawan owns all the outstanding shares of stock of Production; that on September 24, 1997, Production and Palawan were merged in accordance with the Delaware Corporation Law with Palawan as the surviving entity; that the merger was effected through the filing of the Certificate of Ownership and Merger which merged Production into Palawan; that on September 24, 1997, the Certificate of Ownership and Merger was filed with the Secretary of State of Delaware, USA; that under such merger, Palawan, the parent company, assumed all the rights, privileges, powers, property, liabilities, duties and obligation of its subsidiary, Production; that subsequent to the merger of Production into Palawan, the latter was merged with Alcorn Philippines with the latter as the surviving corporation, likewise in accordance with the provisions of the Delaware Corporation Law; that the Certificate of Merger with the Plan and Agreement of Merger were filed with the Secretary of State of Delaware on September 24, 1997; that under the Plan and Agreement of Merger, the merger of Palawan with and into Alcorn Philippines shall become effective on the date the Certificate of Merger is filed with the Secretary of State of Delaware; that at the effective time of the merger: (1) The constituent corporations shall be a single corporation named Alcorn (Philippines), Inc. which shall be the surviving corporation; (2) The separate existence of the merged corporation Palawan shall cease; (3) The surviving corporation shall thereupon and thereafter possess all the rights, privileges, powers and franchises of a public as well as of a private nature, and be subject to all the restrictions, disabilities and duties, of each constituent corporation; and all and singular, the rights, privileges, powers and franchises of each constituent corporation, shall be vested in the surviving corporation; and all property, rights, privileges, powers and franchises, and all and every other interest, shall thereafter as effectively be the property of the surviving corporation as they were of the respective constituent corporations, and the title to any real estate vested by deed or otherwise in either constituent corporation shall not revert or be in any way impaired by reason of the merger; but all rights of creditors and all liens upon any property of either constituent corporation shall be preserved unimpaired, and all debts, liabilities and duties of the respective constituent corporations shall thenceforth attach to the surviving corporation and may be enforced against it to the same extent as if such debts, liabilities, and duties had been incurred or contracted by it. Specifically, but not by way of limitation, any action or proceeding, whether civil, criminal or administrative, pending by or against either constituent corporation shall be prosecuted as if the merger had not taken place, or the surviving corporation may be sustained in such action or proceeding; (4) All corporate acts, plans, policies, contracts, approvals and authorizations of the merged corporations and their shareholders, Board of Directors, committees elected or appointed by the Board of Directors, officers and agents, which were valid and effective immediately prior to the effective time of the merger shall be taken for all purposes as the acts, plans, policies, contracts, approvals, and authorizations of the surviving corporation and shall be as effective and binding thereon as the same were with respect to the surviving corporation. The employees of the merged corporation shall become the employees of the surviving corporation and continue to be entitled to the same rights and benefits that they enjoyed as employees of the merged corporation; (5) The directors and officers of the surviving corporation in office immediately prior to the effective time shall be the directors and officers of the surviving corporation and shall hold office from the effective time until their respective successors shall have been duly elected and qualified in accordance with law and with the By-laws of the surviving corporation; By virtue of the aforementioned mergers effected in the United States: 1. (a) The Philippine branch of Production ceased to exist when its head office was merged with and into Palawan in accordance with Delaware Corporation Law; (b) The Philippine branch of Palawan automatically assumed all the assets and liabilities of Production (Philippine branch). 2. (a) The Philippine Branch of Palawan ceased to exist when its head office was merged with and into Alcorn Philippines; (b) The Philippine Branch of Alcorn Philippines automatically assumed all assets and liabilities of Palawan Philippine branch (which includes all the assets and liabilities of Production Philippine branch, by virtue of the previous merger). and that as a result of the merger, the assets and liabilities of Production and Palawan's respective Philippine branches were consolidated into the Philippine branch of Alcorn Philippines resulting in economies of scale and efficiency/simplicity of operations. Based on the foregoing representations, you now request for opinion that "1. No gain or loss shall be recognized on the transfer by Production Philippine branch of its assets and liabilities to Palawan Philippine branch as a consequence of the merger between their parent companies, Production and Palawan, respectively; "2. No gain or loss shall be recognized on the transfer by Palawan Philippine branch of its assets and liabilities (inclusive of the assets and liabilities of Production Philippines which were previously transferred in accordance with the first merger) to Alcorn Philippines (Philippine branch), as a consequence of the merger between their parent companies, Palawan and Alcorn Philippines, respectively; "3. No gain or loss shall be recognized on the exchange by Palawan shareholders of their shares of stock for Alcorn Philippines common stock; "4. Since the transfer of the assets and liabilities of first, Production Philippine branch to Palawan Philippine branch and second, of Palawan Philippine branch to Alcorn Philippines Philippine branch, is pursuant to the merger of their respective parent companies, then such transfer shall not be considered as a transfer of property for insufficient consideration and is therefore, not subject to donor's tax. There is no intention to donate on the part of the transferors and the transaction is effected purely for business reasons; "5. The transfer of properties by Production Philippine branch and Palawan Philippine branch in pursuance to a merger is not a sale, barter, and exchange of properties in the course of trade or business and is therefore not subject to VAT; and "6. Each issued an outstanding share of the merged corporation common stock (Palawan) outstanding immediately before the effective time will be converted into one newly issued share of the surviving corporation common stock (the New Shares). In reply, please be informed as follows 1. No gain or loss shall be recognized on the transfer by Production Philippine branch of its assets and liabilities to Palawan Philippine branch as a consequence of the merger between their parent companies, Production and Palawan, respectively, since there is no effective transfer of beneficial ownership. In a merger, the surviving corporation (Palawan) succeeds to the rights and liabilities of the absorbed corporation (Production), and merely carries on the identity of the latter. (Cashman vs. Browhee, 27 N.E. 560). Consequently, no gain was recognized by the surviving corporation, Palawan Philippine branch. 2. No gain or loss shall be recognized on the transfer by Palawan Philippine branch of its assets and liabilities (inclusive of the assets and liabilities of Production Philippines which were previously transferred in accordance with the first merger) to Alcorn Philippines (Philippine branch), as a consequence of the merger between their parent companies, Palawan and Philippines, respectively. 3. No gain or loss shall be recognized on the exchange by Palawan shareholders of their shares of stock for Alcorn Philippines common stock. 4. The transfer of the assets and liabilities of first, Production Philippine branch to Alcorn Palawan Philippine branch and second, of Palawan Philippine branch to Alcorn Philippines Philippine branch, pursuant to the merger of their respective parent companies, shall not be considered as a transfer of property for insufficient consideration and is, therefore, not subject to donor's or gift tax, since there is no intention to donate on the part of either or both parties and the transaction is effected purely for business reasons. 5. The transfer of properties by Production Philippine branch and Palawan Philippine branch in pursuance to a merger is not a sale, barter, and exchange of properties in the course of trade or business and is therefore not subject to value-added tax. (Sec. 4.100-5(b)(3) of Revenue Regulations No. 7-95) (BIR Ruling No. 112-96 dated October 25, 1996) 6. Each issued an outstanding share of the merged corporation common stock (Palawan) outstanding immediately before the effective time will be converted into one newly issued share of the surviving corporation common stock. LLjur 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 Deputy Commissioner (Legal & Enforcement Group)