BIR Ruling [DA-560-04]

November 8, 2004 BIR RULING [DA-560-04] 175; Sec. 56 RR 2 # 015-2003; DA-221-2002; DA-511-2003 Siguion Reyna Montecillo & Ongsiako Law Offices 4th and 6th Floors, Citibank Center 8741 Paseo de Roxas, Makati City Attention: Attys. Jose Lis C. Leagogo, Leonardo Siguion Reyna, Jr., Nicanor N. Padilla and Ajee A. Tiu-Co Gentlemen : This refers to your letter dated August 2, 2004 requesting on behalf of your client, Electrolux Philippines, Inc . (hereafter referred to as "Electrolux"), for a confirmation of your opinion that the conversion of the deposits for future capital subscriptions made by AB Electrolux Sweden (hereafter referred to as "ABE") into additional paid-in capital ("APIC") or paid-in surplus of Electrolux is not subject to income, donor's and documentary stamp tax (DST). The facts, as represented, are as follows: 1. Electrolux is a corporation organized and existing under Philippine laws. It is primarily engaged in the business of trading of goods such as household appliances, kitchen cabinets and fixtures on wholesale basis and to provide after sales service for the same. 2. ABE is a non-resident corporation organized and existing under the laws of Sweden. 3. Electrolux was incorporated on October 25, 2001 as a wholly owned subsidiary of Electrolux Thailand Company, Ltd. (ETCL). At around the same time, on October 24, 2001, ETCL (thru its Managing Director, Fredrik Jan Olof Ramen) executed a Declaration of Trust declaring, among others, that the 101,995 Electrolux shares (represented by Electrolux Stock Certificate No. 1) are held by ETCL in trust for ABE. 4. Thereafter, a Deed of Termination of Trust was executed between ABE and ETCL. Accordingly, Electrolux Stock Certificate No. 1 evidencing ETCL's 101,995 shares in Electrolux was cancelled and a new one issued in favor of ABE for the same number of shares. DEHaTC 5. ABE has remitted USD 1,747,780 with a peso equivalent of P89,800,000.00, to Electrolux in the form of a deposits for future capital subscriptions. ABE now wishes to convert the entire amount of its deposits for future capital subscriptions into equity, without the issuance of new Electrolux shares, to be recorded in Electrolux books as additional paid-in capital or paid-in surplus. In reply, please be informed that Section 56 of Revenue Regulations (RR) No. 2 provides that where a corporation requires additional funds for conducting its business and obtains said funds through voluntary payments by its shareholders, the amounts so received being credited to its surplus account or to a special account, will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as part of the operating capital of the company. In BIR Ruling No. 586-88 dated December 19, 1988, this Office had the occasion to rule that the additional contribution in the form of donated surplus without the necessity of issuing additional shares of stock is deemed capital investment which is not included within the purview of the term "taxable income" and is not subject to income tax. In another occasion, this Office also ruled that additional capital contribution without necessarily issuing additional shares of stock, which merely increase the basis of the stockholders' stock but not their proportionate equity in the corporation, is a transaction not subject to income or gift taxes. ( BIR Ruling Nos. 270-87 dated September 8, 1987 and 127-89 dated June 13, 1989 ) Accordingly, this Office hereby confirms your opinion that the conversion of the deposits for future capital subscriptions made by ABE into additional paid-in capital or paid-in surplus of Electrolux is not subject to income and donor's taxes because the infusion of APIC by ABE into Electrolux is in the nature of additional funds which will be used as, and forms part of, the latter's working capital for which no corresponding shares of stock will be issued. As such the APIC does not constitute an income on the part of Electrolux. ( BIR Ruling No. DA-221-2002 dated November 25, 2002 ) Considering the fact that no new Electrolux shares shall be issued in exchange for the conversion, the same shall not be subject to documentary stamp tax imposed under Section 175 of the Tax Code of 1997. ( BIR Ruling No. 015-2003 dated November 17, 2003 and CTA Case No. 5988 entitled First Southern Philippines Enterprises, Inc. vs. Commissioner of Internal Revenue which became final and executory on February 13, 2002 ) 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group