BIR Ruling [DA-406-98]

September 7, 1998 BIR RULING [DA-406-98] Bernas Law Offices 7/F North Davao Mining Corporation Building 104 Gamboa Street Legaspi Village Makati City Attention: Atty . Rosario Theresa O . Seechung Gentlemen : This refers to your letter dated June 15, 1998 requesting for a ruling on the tax consequence of the merger of your clients, Primavera Managers and Development Corporation (Primavera), Resepico Realty and Development Corporation (Resepico), Mil Flora Properties, Inc. (Mil Flora) and Planters DB Properties, Inc. (PDBPI). cdt It is represented that Primavera, Resepico, Mil Flora and PDBPI are all domestic corporations duly organized and existing under the laws of the Philippines and are engaged in the real estate business; that at the time of merger, Primavera has an authorized capital stock of P3,200,000.00 divided into 6,400 shares with a par value of P500.00 per share; that the total subscriptions to the capital stock amounted to P800,000.00, all of which had been fully paid; that as of February 28, 1997, Primavera had total assets of P108,738,900.54, total liabilities of P103,154,622.56, thus leaving a net asset value of P5,584,277.98; that Resepico has an authorized capital stock of P35,000,000.00 divided into 350,000 shares with a par value of P100.00 per share; that of the total authorized capital stock, P28,425,000.00 had been subscribed and fully paid; that as of February 28, 1997, Resepico had total assets of P64,511,987.84, total liabilities of P64,403,552.82, thus leaving a net asset value of P108,435.02; that Mil Flora has an authorized capital stock of P8,000,000.00 divided into 80,000 shares with a par value of P100.00 per share; that the total subscriptions to the capital stock amounted to P2,000,000.00 which has been fully paid; that as of February 28, 1997, Mil Flora had total assets of P144,900,837.84, and total liabilities of P142,470,733.58, thus leaving a net asset value of P2,430,104.26; that the Securities and Exchange Commission (SEC) has recently approved PDBPI's application for the increase of its authorized capital stock from P10,000,000.00 to P200,000,000.00 divided into 199,800,000 common shares and 200,000 preferred shares, all with a par value of P1.00 per share; that of the entire increase in authorized capital stock of P190,000,000.00, a total of 134,584,677 common shares with an aggregate par value of P134,584,677.00 were subscribed as follows: Subscriber No . of Shares Amount Subscribed Amount Paid-up Capital Shares 116,831,600 P116,831,600.00 P50,099,723.00 Investment Corp. Planters Development Bank 12,168,800 12,168,800.00 1,015,416.00 Jesus P. Tambunting 3,490,173 3,490,173.00 3,490,173.00 Ma. Flordelis F. Aguenza 1,396,069 1,396,069.00 1,396,069.00 Ronald A. Polido 558,428 558,428.00 558,428.00 Nestor Quirino D. Gregorio, Jr. 69,803 69,803.00 69,803.00 Lorna R. Flojo 69,804 69,804.00 69,804.00 Total 134,584,677 P134,584,677.00 P56,699,416.00 ========= ============ =========== that the above subscriptions are to be paid as follows: a) P48,576,600.00 by way of assignment by Capital Shares Investment Corporation in favor of PDBPI of capital's 400,000 common shares of stock in PDB Leasing Corporation with par value of P100.00 per share; b) P8,122,816.00 as a result of the merger between and among PDBPI, Primavera, Resepico and Mil Flora; that after the increase in authorized capital stock of PDBPI and as a consequence of the merger, the resulting outstanding capital stock of PDBPI shall be as follows: Subscriber No . of Shares Amount Subscribed Amount Paid-up Capital Shares 122,845,790 P122,845,790.00 P56,133,913.00 Investment Corp. Planters Development Bank 16,154,555 16,154,555.00 5,001,171.00 Jesus P. Tambunting 3,490,184 3,490,184.00 3,490,184.00 Ma. Flordelis F. Aguenza 1,396,080 1,396,080.00 1,396,080.00 Ronald A. Polido 558,439 558,439.00 558,439.00 Nestor Quirino D. Gregorio, Jr. 69,814 69,814.00 69,814.00 Lorna R. Flojo 69,815 69,815.00 69,815.00 Total 144,584,677 P144,584,677.00 P66,699,416.00 ========= ============ =========== that as of February 28, 1997, PDBPI had total assets of P293,251,776.58, and total liabilities of P256,012,150.40, thus leaving a net asset value of P37,239,626.18; that for the purpose of consolidating their operations in order to ensure their viability and competitiveness and to realize economies in operations, PDBPI, Primavera, Resepico and Mil Flora executed a Plan of Merger whereby PDBPI will be the surviving corporation and Primavera, Resepico and Mil Flora will be the absorbed corporations; that pursuant to the Plan of Merger, PDBPI, as the surviving corporation will, upon the effective date of the merger, acquire all rights, businesses, assets and other properties of Primavera, Resepico and Mil Flora, including but not limited to, all of their respective real and personal properties, contractual rights, licenses, privileges, property rights, claims, bank deposits, stocks, accounts receivable, credit lines, supplies, equipment, inventory and such other assets as shown in their respective balance sheets; that PDBPI shall assume all the liabilities and obligations of Primavera, Resepico and Mil Flora in the same manner as if PDBPI had itself incurred all such liabilities and obligations; that in exchange for the transfer by Primavera, Resepico and Mil Flora to PDBPI of all their assets and liabilities, all the shares of Primavera, Resepico and Mil Flora shall be surrendered to the Corporate Secretary of PDBPI to be converted into 8,122,816 common shares of PDBPI as follows: casia A. Existing shareholdings in Mil Flora, Resepico and Primavera Shareholder In Mil Flora In Resepico In Primavera Capital Shares 12,000 170,550 n.a. Investment Corp. Planters Development Bank 7,995 113,693 n.a. Jesus P. Tambunting 1 3 1,000 Ma. Flordelis F. Aguenza 1 1 400 Ronald A. Polido 1 1 160 Nestor Quirino D. Gregorio, Jr. 1 1 20 Lorna R. Flojo 1 1 20 Total 20,000 284,250 1,600 ========= ============ ===== B. Schedule of Shares in Mil Flora, Resepico and Primavera to be converted to PDBPI shares of stock based on stockholders' equity in Mil Flora, Resepico and Primavera: Shareholder From Mil Flora From Resepico From Primavera PDBPI shares to Shares Shares Shares be Issued Capital Shares 1,458,062.00 65,061.00 n.a. 1,523,123 Investment Corp. Planters Development Bank 972,042.00 43,374.00 n.a. 1,015,416 Jesus P. Tambunting n.a. n.a. 3,490,173.00 3,490,173 Ma. Flordelis F. Aguenza n.a. n.a. 1,396,069.00 1,396,069.00 Ronald A. Polido n.a. n.a. 558,428.00 558,428 Nestor Quirino D. Gregorio, Jr. n.a. n.a. 69,803.00 69,803 Lorna R. Flojo n.a. n.a. 69,804.00 69,804 Total 2,430,104.00 108,435.00 5,584,277.00 8,122,816 ========= ======== ========= ======= Stockholders' Equity 2,430,104.26 108,435.02 5,584,277.98 that each holder of an outstanding certificate of stock of Primavera, Resepico and Mil Flora shall surrender the same duly endorsed to PDBPI for cancellation and each such holder shall then receive the certificate of stock representing the appropriate number of PDBPI shares; that upon the effective date of the merger, Primavera, Resepico at Mil Flora shall cease to exist as corporations by operation of law, and the stockholders of Primavera, Resepico and Mil Flora will be deemed stockholders of PDBPI; that the directors and officers of PDBPI, as the surviving corporation, shall be the same as the directors and officers of PDBPI in office immediately prior to merger, and their respective terms of office shall not be changed by the merger; and that on February 20, 1998, the Securities and Exchange Commission (SEC) approved the Articles and Plan of Merger of the above-mentioned corporations. cdt In connection therewith, you now request confirmation of your opinion that: "1. The above-described reorganization of PDBPI, Primavera, Resepico and Mil Flora is a merger within the contemplation of Section 40(C)(2) of the Tax Code of 1997, because PDBPI will acquire/assume all the assets and liabilities of Primavera, Resepico and Mil Flora solely in exchange for shares of stock of PDBPI, and because the reorganization is being undertaken for a bona-fide business purpose and not for the purpose of escaping the burden of taxation; "2. In accordance with Section 40(C)(2) of the Tax Code of 1997, no gain or loss shall be recognized a) On Primavera, Resepico and Mil Flora, the transferors, and the PDBPI, the transferee, on the transfer by Primavera, Resepico and Mil Flora of all their respective assets and liabilities to PDBPI, in exchange for PDBPI shares, pursuant to the merger; b) On Primavera, Resepico and Mil Flora on the distribution of the PDBPI shares to the stockholders of Primavera, Resepico and Mil Flora, in complete redemption of their stocks, pursuant to the merger; and c) On the stockholders of Primavera, Resepico and Mil Flora on the exchange of their shares of stock of Primavera, Resepico and Mil Flora solely for PDBPI shares, pursuant to the merger; "3. The basis of the PDBPI stock received by the stockholders of Primavera, Resepico and Mil Flora is the same as their basis in the Primavera, Resepico and Mil Flora stock surrendered in exchange pursuant to the merger; "4. The basis of the assets received by PDBPI shall be the same as it would be in the hands of Primavera, Resepico and Mil Flora; "5. The transfer of the assets and liabilities by Primavera, Resepico and Mil Flora to PDBPI in exchange solely for its shares will not be considered as transfer of property for insufficient consideration subject to gift tax, since there is no intention to donate on the part of any of the parties and the transaction is effected purely for business reasons; and "6. For value-added tax (VAT) purposes, the transfer of the assets, including tangible and movable properties, by Primavera, Resepico and Mil Flora to PDBPI pursuant to the merger will not be subject to any output tax, and any unused input tax of Primavera, Resepico and Mil Flora as of the effective date of the merger will be absorbed by PDBPI as the surviving corporation, pursuant to Section (b)(3) of Revenue Regulations No. 5-87. In reply, please be informed that your opinion is hereby confirmed as follows: 1. The above reorganization is a merger within the contemplation of Section 40(C)(2) and (6)(b) of the Tax Code of 1997, because PDBPI will acquire/assume all the assets and liabilities of Primavera, Resepico and Mil Flora solely in exchange for shares of stock of PDBPI, the transaction undertaken is being for a bona-fide business purposes and not for the purpose of escaping the burden of taxation. 2. The transfer by Primavera, Resepico and Mil Flora of all their assets and liabilities to PDBPI solely in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 40(C)(2) and (6)(b) of the Tax Code of 1997. No gain or loss shall be recognized to Primavera, Resepico and Mil Flora upon the distribution of PDBPI shares to Primavera, Resepico and Mil Flora stockholders in complete redemption of their stocks under Section 40(C)(2) of the Tax Code of 1997. No gain or loss shall be recognized to Primavera, Resepico and Mil Flora stockholders upon the exchange of their stocks solely for PDBPI stocks under Section 40(C)(2) of the said Code. 3. The basis of the PDBPI stocks received by the stockholders of Primavera, Resepico and Mil Flora shall be the same as the basis of the Primavera, Resepico and Mil Flora stocks surrendered in exchange therefor. 4. The basis of the assets received by PDBPI shall be the same as it would be in the hands of Primavera, Resepico and Mil Flora. If the total liabilities to be assumed by PDBPI upon the effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by Primavera, Resepico and Mil Flora, the excess shall be recognized as gain to Primavera, Resepico and Mil Flora. (Section 40(C)(4)(b) of the Tax Code of 1997). 5. The transfer of the assets and liabilities by Primavera, Resepico and Mil Flora to PDBPI in exchange solely for its shares will not be considered as transfer of property for insufficient consideration subject to gift tax, since there is no intention to donate on the part of the parties and the transaction is effected purely for business reasons. 6. The transfer of the assets, including tangible and movable properties by Primavera, Resepico and Mil Flora to PDBPI pursuant to the merger will not be subject to value-added tax and any unused input tax of Primavera, Resepico and Mil Flora as of the effective date of the merger, will be absorbed by PDBPI as the surviving corporation, pursuant to Section 4.100-5(b)(3) of Revenue Regulations No. 7-95. It is understood, however, that upon the subsequent sale or exchange of the assets or shares of stock acquired by the parties, the gain derived from such sale or exchange shall be subject to income tax. However, in order that the above-described reorganization can be considered as merger under Section 40(C)(2) and (6)(b) of the Tax Code of 1997, the parties to the merger should comply with the following requirements: A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation, which is a party to the reorganization, shall file, as part of its return for the taxable year within which the reorganization occurred a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including: LLpr 1. A copy of the plan of reorganization, together with a statement executed under the penalties of perjury, showing in full the purposes thereof and in detail all transactions incident to, or pursuant to the plan; 2. A complete statement of all cost or other basis of all property, including all stocks or securities, transferred incident to the plan; 3. A statement of the amount of stock or securities and other property or money received from the exchange, including a statement of all distribution of other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value thereof at the date of the exchange. 4. A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject. B. Every taxpayer, other than a corporation, party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the non-recognition of gain or loss upon such exchange, including: 1. A statement of the cost or other basis of the stock or securities transferred in the exchange; and 2. A statement in full of the amount of stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property received is subject. The amount of each kind of stock or securities and other property (other liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at the date of the exchange. C. Records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liabilities assumed on the exchange, or any liabilities to which any of the properties received were subject), in order to facilitate the determination of gain or loss from subsequent disposition of such stock or securities and other property received from the exchange. (par. 9803-8, F-H 963, ed., p. 9611) In addition to the foregoing requirements, records in substantial form must be kept by the corporation participating in the merger showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stock received as a consequence of the merger. (BIR Ruling No. 472-93 dated December 3, 1993) 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. cdll Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)