Baniqued & Baniqued Attorneys at Law

November 6, 2007 BIR RULING [DA-576-07] 34 (D) (3); RR 14-2001; 40 (C) (2) & (6) (b) S-40-023-2007 Baniqued & Baniqued Attorneys at Law Suite 803, 8/F Jollibee Centre San Miguel Avenue Pasig City Attention: Attys. Laura Victoria A.S. Yuson-Layug Suzette A. Celicious-Sy and Kathleen L. Saga This refers to your letter dated September 26, 2007 requesting clarification of BIR Ruling No. S-40-023-2007 dated August 31, 2007 discussing the tax consequences of the merger of Republic Cement Corporation ("RCC") and its subsidiaries, Fortune Cement Corporation ("FCC") [to the extent of 99.24%], FR Cement Corporation ("FRCC") [to the extent of 98.86%] and Lloyds Richfield Industrial Corporation ("LRIC") [to the extent of 100%] , pursuant to Sections 40 (C) (2) and 40 (C) (6) (b) of the Tax Code of 1997 ("Tax Code"). In particular, you request clarification of the "no ruling" statement on the Net Operating Loss Carry Over ("NOLCO") in paragraph 6 of the BIR Ruling. IESTcD Background In BIR Ruling No. S-40-023-2007, it was confirmed that the merger of RCC, FCC, FRCC and LRIC is a merger within the contemplation of Section 40 (C) (6) (b) of the Tax Code inasmuch as the merger was being undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation. The ruling thus confirmed the corresponding tax treatment of the gain or loss, for income tax purposes, on the part of the transferors of the assets and liabilities, their respective shareholders, and the transferee, as well as the documentary stamp tax, donor's tax and value-added tax on the transaction and, the transfer of the unutilized creditable withholding tax and other tax attributes as of the cut-off date of the merger. However, on the matter of the unexpired and unutilized NOLCOs of the absorbed corporations, FCC, FRCC and LRIC, BIR Ruling No. S-40-023-2007 stated "this Office cannot rule on the issue of NOLCO," citing Revenue Bulletin No. 1-2003 listing the No-Ruling Areas. THaDAE In connection therewith, you now request clarification that the statement on the NOLCO means that if upon factual verification it is ascertained that the statutory merger of RCC, FCC, FRCC and LRIC does not result in a substantial change in the ownership of the business or enterprise, the unutilized and unexpired NOLCOs of FCC, FRCC and LRIC, if any, shall be transferred to and vested in RCC by operation of law pursuant to the statutory merger of the corporations. In reply, please be informed that Section 34 (D) (3) of the Tax Code provides in part: (3) Net Operating Loss Carry-over . The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss; AaEcHC Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that (i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy-five percent (75%) of the paid-up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. Revenue Regulations (RR) No. 14-2001 explicitly recognizes that no actual change in ownership is involved in the case of merger of the subsidiary into the parent company, to wit: CIAHDT 3.12 By or on Behalf of the Same Persons The term "By or on Behalf of the Same Persons" shall refer to the maintenance of ownership despite change as when: 2. No actual change in ownership is involved as in the case of merger of the subsidiary into the parent company. Illustration: Facts: X Corporation owns 100% of Y Corporation. Y Corporation owns 100% of Z Corporation. Z Corporation has NOLCO. Z Corporation is merged into Y Corporation. Held: Z Corporation's NOLCO should be retained and transferred to Y Corporation. Prior to the merger, X Corporation already indirectly owned Z Corporation, i.e., Z Corporation's shares were held "by" Y Corporation "on behalf of" X Corporation. After the merger, X now directly owns Z Corporation [absorbed corporation] which continues to exist in Y Corporation. CHcTIA Any reference in these Regulations to the "75% equity, ownership, or interest rule", "75% or more in nominal value", "75% or more interest", and other similar terms shall be construed within the context of this definition. If, as represented, FCC, FRCC and LRIC are owned by RCC to the extent of 99.24%, 98.86% and 100%, respectively, the statutory merger of FCC, FRCC, LRIC and RCC undertaken for a bona fide business purpose will clearly not result in an effective change in ownership. Therefore, subject to factual verification that the statutory merger of RCC, FCC, FRCC and LRIC does not result in an effective change of ownership of the business or enterprise, the unutilized and unexpired NOLCOs of FCC, FRCC and LRIC, if any, shall be transferred to and vested in RCC by operation of law pursuant to the statutory merger of the corporations and may be claimed by RCC as a deduction from gross income for the remainder of the three-year period counted from the year the NOLCO was incurred. 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. HTcDEa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service