Quezon Capital Rural Bank, Inc.

September 14, 2007 BIR RULING [DA-494-07] Quezon Capital Rural Bank, Inc. Perez corner C.M. Recto Streets Lucena City Attention: Mr. Alexander M. Calma Executive Vice-President/COO Gentlemen : This refers to your letter dated April 30, 2007 reiterating your request for exemption from the payment of capital gains and documentary stamp taxes on the transfer by Spouses Leandro and Milagros Garcia of their properties in exchange for the shares of stock of Quezon Capital Rural Bank, Inc. in accordance with Section 40 (C) (2) (c) of the Tax Code of 1997, as amended. It is your contention that the requirement of "control" over the transferee corporation should be construed to include not only the stockholdings of the transferor/s of property in exchange for shares of stock but should include also the existing stockholdings of other stockholders who are not even transferors of property at the time of the exchange transaction, so long as their number does not exceed the maximum of five (5) persons. We regret to inform you that this Office does not agree with your contention. The last paragraph of Section 40 (C) (2) (c) of the Tax Code, as amended, in relation to paragraph (6) (c) of the same Section, states as follows: "No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation : . . . ." "(c) The term 'control', when used in this Section, shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. " (Emphasis supplied) ISTHED The foregoing has been consistently construed by the Bureau through several rulings and issuances, to mean that the transfer of property or properties in exchange for shares of stock of a corporation would in a situation wherein the transferors of property or properties, not exceeding the maximum number of five (5) persons, would simultaneously gain control over the transferee corporation as a consequence thereof. Thus, the Bureau set as a requisite that the transfer of property should be made by one person or together with others, but not to exceed four persons, with the end of gaining control over the transferee corporation as a result of the said transfer transaction. A departure of this interpretation would render the above qualification nugatory since by simply adding the existing stockholdings of other stockholders would readily produce the requirement of "control". In view thereof, and since the above spouses-transferors obtained only 36.89% of the total voting stocks of the transferee corporation, therefore, short of the requirement set forth under Section 40 (C) (2) (c) of the Tax Code, as amended, in relation to paragraph (6) (c) of the same Section, this Office regrets to inform you that your request for exemption is hereby denied again for lack of legal basis. Please be guided accordingly. (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service