BIR Ruling [DA-488-99]

August 26, 1999 BIR RULING [DA-488-99] Padilla Law Office 232 Juan Luna Street Binondo, Manila Attention: Atty . Sabino Padilla, Jr . Gentlemen : This refers to your letter dated July 12, 1999 stating that your client, Program Realty Co., Inc. (Program) is a landholding company which is 60% owned by Ayala Corporation (Ayala) and 40% owned by Procter and Gamble (P&G); that P&G is a foreign corporation licensed to do business in the Philippines; that Program owns two (2) properties, one is located in Cabuyao, Laguna with a book value of P259,259,000.00 and the other is located in Tondo, Manila with a book value of P10,865,000.00; that the estimated fair market value of the Cabuyao property is P886,000,000.00 while that of the Tondo property is P1,188,000,000.00; that both properties are presently leased to P&G; that, however, P&G has decided to transfer all of its operations to Cabuyao, Laguna, and therefore is phasing out all its operations in Tondo, Manila; that about 80% of its operations are now in Cabuyao and by the end of 1999, all operations in Tondo will cease, and Program and P&G have agreed to cancel the lease of the Tondo property effective December 31, 1999; that since Tondo property will no longer be leased to P&G effective December 31, 1999 nor used in business after that date, Program intends to create a 100% real estate subsidiary, to be called Tondo Realty Co., and transfer the Tondo property to it in exchange solely for stock; that the transfer of the Tondo property will be at book value; that Tondo Realty Co. will record the property received at its book value in the books of Program, and Program will record the shares of stock received at the same book value as the Tondo property transferred; that upon receipt of the shares in Tondo Realty Co., Program will distribute said shares as a property dividend to its stockholders, Ayala and P&G, in proportion to their stockholdings; and that the shares will be distributed at book value and the book value of the property dividend will be charged against unrestricted retained earnings of Program, which is more than enough to cover such a property dividend declaration at book value. In connection therewith, you now request confirmation of your opinion that "1) The transfer by Program of the Tondo property to Tondo Realty Co. in exchange solely for stock of Tondo Realty Co. is exempt from income tax under Section 40(C)(2)(c); however, Tondo Realty Co.'s tax basis for the Tondo property will be the same as the tax basis (book value) of the property in the hands of Program; Program in turn will record the shares of stock received at the same book value as the Tondo property which it had transferred to Tondo Realty Co.; "2) The declaration of the shares of stock of Tondo Realty Co. as property dividend, made at book value of the shares, will not give rise to income or capital gains to either Program Realty Co. or to its stockholders who receive such property dividend, and that such transfer will be subject to a final withholding tax of zero percent (0%); "3) The Deed of Conveyance to be executed between Program and Tondo Realty Co. covering the real estate properties transferred in exchange solely for stock shall not be subject to documentary stamp taxes, except for the P15.00 documentary stamp tax under Section 188 of the Tax Code; "4) The issuance of shares of stock by Tondo Realty Co. will be subject to documentary stamp tax under Section 175 of the Tax Code, based on the book value of shares of stock issued, which in turn will be based on the book value of the Tondo property transferred to it; "5) The declaration by Program of a property dividend consisting of shares of stock of Tondo Realty Co. will not be subject to documentary stamp tax or value-added tax; and "6) The issuance of new shares of Tondo Realty Co. to Ayala and P&G as a result of the property dividend will be subject to documentary stamp tax under Section 176 based on the book value of the shares declared as property dividend. In reply, please be informed that your opinion is hereby confirmed as follows: 1) Section 40(C)(2) and (6)(c) of the Tax Code of 1997 provides that no gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stocks in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation. The term "control" shall mean ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stocks received, i.e., total subscribed, whether for property or for services by the transferor or transferors. In determining the 51% stock ownership, only those persons who transferred property for stock in the same transaction may be counted up to a minimum of five. Accordingly, no gain or loss shall be recognized both to the transferor corporation and the transferee corporation on the transfer by Program of the Tondo property in exchange for the shares of stock of Tondo Realty Co., provided that the transferor corporation, Program will gain control of the latter corporation. Moreover, the cost basis of the Tondo property shall be the same as it would be in the hands of the transferor, Program and the cost basis of the shares of stocks shall be the same as the book value as the Tondo property which it had transferred to Tondo Realty Co. 2) The property dividend consisting of the shares of stock in Tondo Realty Co. to be declared at its book value by Program or to its stockholders (Ayala and P&G) is not subject to income or capital gains pursuant to Sections 27(D)(4). Moreover, the stockholders (Ayala and P&G), being the recipient corporations are not subject to any income or capital gains arising from its receipt of the shares of stock as property dividends. 3) The Deed of Conveyance to be executed between Program and Tondo Realty Co. covering the real estate properties transferred in exchange solely for stock and declared as property dividends, not being a sale and without monetary consideration, shall not be subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997, but only to the documentary stamp tax of P15.00 pursuant to section 188 of the said Code. (BIR Ruling No. 498-93 dated December 20, 1993) 4) The certificates of stock to be issued by Tondo Realty Co. are, in all probability original issues which are subject to documentary stamp tax imposed under Section 175 of the Tax Code of 1997 based on the book value of shares of stock issued, which in turn will be based on the book value of the Tondo property transferred to it. cdlex 5) Considering that the declaration by Program of a property dividend consisting of shares of stock of Tondo Realty Co. is not in connection with a sale and the same is without any monetary consideration, it is not subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997. Moreover, the declaration by Program of the property dividend consisting of shares of stock of Tondo Realty Co. is not subject to value-added tax inasmuch as the shares of stock distributed as property dividend was not primarily held for sale to customers or held for lease in the ordinary course of business of Program. (Sec. 109(w) of the Tax Code of 1997) 6) The issuance of new shares of Tondo Realty Co. to Ayala and P&G as a result of the property dividend shall be subject to documentary stamp tax imposed under Section 176 of the Tax Code of 1997, based on the book value of the shares declared as property dividend. (BIR Ruling No. 108-93 dated March 16, 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. llcd Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)