BIR Ruling [DA-463-03]

December 5, 2003 BIR RULING [DA-463-03] 28 (B) (5) (c); DA 053-02 SGV & Co . 6760 Ayala Avenue Makati City Attention: Atty . Veronica A . Santos Gentlemen : This refers to your letter dated September 3, 2002 stating that KPIC Netherlands B.V. (KPN) is a non-resident foreign corporation organized and existing under the laws of the Netherlands; that KPN is one hundred percent (100%) owned by Kansai Power International Corporation (KPI), a non-resident foreign corporation organized and existing under the laws of Japan; that KPN owns one hundred percent (100%) of the shares of stock of KPS Singapore Pte. Ltd. (KPS), a non-resident foreign corporation organized and existing under the laws of Singapore; that KPS is the owner of one hundred forty nine (149) common shares and one hundred sixty-five thousand nine hundred twenty four (165,924) series A Preferred shares of stock in San Roque Power Corporation (SRPC), a corporation organized and existing under the laws of the Philippines; that KPS is also the beneficial owner of one (1) common share in SRPC which is in the name of Mr. Kimio Takahashi, an employee of KPI; that the Kansai Electric Power Co., Inc. and its affiliates (Kansai Group) is currently in the process of corporate restructuring in accordance with the Kansai Group Restructure Plan; that after a review of the operations of its various subsidiaries, it has decided to liquidate KPS; that the KPS liquidation would result in greater efficiency and economy in the management of the Kansai Group's businesses and would allow it to make productive use of its properties; and that one of the consequences of the liquidation of KPS is that its shares of stock in SRPC (SRPC Shares) will be transferred to KPN by way of a Deed of Assignment in liquidation. Based on the foregoing representations, you now request confirmation of your opinion that "1. The transfer of all the SRPC shares of KPS to KPN by way of liquidating dividends is not a taxable event in the Philippines, and hence, is not subject to the 5%/10% capital gains tax (CGT) imposed under Section 28(B)(5)(c) of the Tax Code of 1997; "2. The receipt by KPN of the SRPC shares as liquidating dividends is not subject to Philippine income tax since any gain therefrom would be a gain derived from sources outside the Philippines; "3. The transfer of the SRPC shares is subject to documentary stamp tax (DST) at the rate of P1.50 per P200.00 par value, or fractional part thereof, under Section 176 of the Tax Code; and "4. Upon presentation of the proof of payment of DST and the ruling to be issued by your Office, the Corporate Secretary of SRPC can record the transfer of the SRPC shares from KPS to KPN in the Stock and Transfer Books of SRPC, and after cancellation of the stock certificates issued in the name of KPS, [issue new stock certificates in the name of KPS], issue new stock certificates in the name of KPN as transferee." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Section 28(B)(5)(c) of the Tax Code of 1997 provides that a net capital gain is realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed through the stock exchange shall be subject to a final tax at the rates prescribed as follows: Not over P100,000 5% On any amount in excess of P100,000 10% In BIR Ruling No. DA053-02 dated March 27, 2002, this Office ruled that the transfer by a liquidating corporation of its remaining assets to its sole stockholder is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in the distribution of its remaining assets to its shareholders as a consequence of its liquidation. Such being the case, the transfer of the SRPC shares by KPS to KPN, its sole shareholder, by way of liquidating dividends is not considered a sale of shares of stock and therefore not subject to the 5%/10% capital gains tax imposed under the aforesaid Section of the Tax Code of 1997. EcaDCI 2. The general rule is that the transfer of shares by a stockholder to a corporation under liquidation in exchange for assets of the liquidated corporation is considered a sale. ( Wise & Co. v. Meer, 78 Phils . 655 [1947] ). Thus, KPN will realize a capital gain or loss on its receipt of the liquidating dividends from KPS consisting of the SRPC shares. The gain consists of the difference between the fair market value of the liquidating dividends and the acquisition cost or adjusted cost to KPN of its shareholdings in KPS. However, the receipt by KPN of the transferred SRPC shares from KPS is not subject to income tax since any gain derived by KPN therefrom would be a gain derived from sources outside the Philippines. Accordingly, KPN, a non-resident foreign corporation, is taxable only on income derived from sources within the Philippines. Any gain derived by KPN from its receipt of the SRPC shares as liquidating dividends from KPS would be considered as gain from sources outside the Philippines, and consequently, is not subject to Philippine income tax. ( BIR Ruling No. 053-02 dated March 27, 2002 ) 3. Section 176 of the Tax Code of 1997 provides that on all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such due-bills, certificates of obligation or stock, to secure the future payment of money, or for the future transfer of any due-bills, certificate of obligation or stock, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such due-bill, certificate of obligation or stock: . . . . The transfer of SRPC shares from KPS to KPN is subject to documentary stamp tax prescribed in Section 176 of the said Code at the rate of P1.50 for every P200.00 or fractional part thereof of the par value of the shares transferred. ( BIR Ruling No. DA411-00 dated November 28, 2000 ) 4. Finally, upon presentment of proof of payment of the documentary stamp tax, the SRPC Corporate Secretary can register the transfer of SRPC shares from KPS to KPN in its stock and transfer book and cancel and issue new stock certificates in the name of the transferee. 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 Deputy Commissioner Legal & Inspection Group