Star Dari, Inc.

October 4, 2007 BIR RULING [DA-525-07] Star Dari, Inc. No. 40 San Miguel Ave. Mandaluyong City Attention: Ms. Mary Anne G. Dino Gentlemen : This refers to your letter dated March 6, 2007 requesting on behalf of Star Dari Inc. (SDI), a ruling that the distribution of property dividends consisting of shares of stock in another domestic corporation, Magnolia Inc. (MI), is not subject to tax. aSTECA It is represented that SDI and MI are domestic corporations duly organized and existing under and by virtue of Philippine laws; that MI has an authorized capital stock of P200,000,000.00 divided into 2,000,000 common shares with a par value of P100.00 each; that of the total authorized capital stock, 1,053,530 shares are outstanding and held by residents of the Philippines; that as of December 31, 2005, it has a total stockholders equity in the amount of P289,160,000.00, which includes unrestricted retained earnings in the amount of P83,807,868.00; that as part of the ongoing realignment of the businesses of the San Miguel Food Group which includes the consolidation of ownership of MI to San Miguel Corporation ("SMC") and San Miguel Purefoods Co. Inc. ("SMPFC"), SDI plans to distribute to all existing stockholders a portion of the said retained earnings as property dividends consisting of 11,116,854 Common B shares of stock of MI with an aggregate issue value of P19,788,000.00. In connection therewith, you are requesting clarification on the tax effects of the foregoing transaction as follows: 1. Is SDI subject to income tax or capital gains tax when it declares to its existing stockholders its entire shareholding in MI by way of property dividends? 2. Are the stockholders of SDI who shall receive said property dividends subject to any income or capital gains tax, and correspondingly, withholding taxes, arising from their receipt of the shares of stock of MI? cEaSHC 3. Is the execution of the Deed of Conveyance by SDI and the recipient stockholders covering the shares of stock of MI subject to DST under Section 176 of the Tax Code, as amended? and 4. Can the property dividends declared be recorded at its book value in the records of SDI and the stockholders of SDI also record the dividends received at the same book value as recorded in SDI's books? In reply, please be informed as follows: 1. Dividends comprise any distribution, whether in cash or other property, in the ordinary course of business, even though extraordinary in amount, made by a domestic or resident foreign corporation to the stockholders out of its earnings or profits (Sec. 250, Income Tax Regulations). A dividend paid in stock of another corporation is not a stock dividend, even though the stock distributed was acquired through the transfer by the corporation declaring the dividends of property to the corporation the stock of which is distributed as a dividend. (BIR Ruling No. 554-88 dated November 22, 1988) DITEAc Such being the case, SDI is not subject to income tax or capital gains tax when it declares and transfers its MI shares as property dividends in favor of its stockholders. (BIR Ruling No. 154-93 dated April 28, 1993). A corporation realized no taxable income in declaring a dividend since the distribution of dividends among the stockholders is not a sale nor were assets used to discharge an indebtedness. (See General Utilities and Operating Co. vs. Helvering 296 U.S. 200-207) (BIR Ruling No. DA-077-98 dated March 12, 1998) 2. Pursuant to Section 27 (D) (4) of the Tax Code of 1997, dividends received by a domestic corporation from another domestic corporation shall not be subject to tax. Such being the case, the receipt of the shares of stock of Ml by the corporate stockholders of SDI, arising from the latter's declaration of property dividends, shall not be subject to any income or capital gains tax and consequently, to the withholding tax. However, in the case of individual stockholders, a final tax at the rate of ten percent (10%) shall be imposed upon the property dividends they will received from SDI in accordance with Section 24 (B) (2) of the Tax Code of 1997, as amended. aEcSIH 3. The Deed of Conveyance to be executed by and between SDI and the recipient stockholders covering the shares of stock of MI declared as property dividends, not being a sale and without any monetary consideration, shall not be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997, as amended. However, the said deed is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the same Code. 4. The property dividends shall be recorded at book value in the books of both the issuing corporation and the recipient stockholders. (BIR Ruling No. 156-94 dated November 16, 1996) 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. cEAaIS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service