BIR Ruling [DA-583-99]

October 6, 1999 BIR RULING [DA-583-99] Guoco Land (Philippines), Inc. 17th Floor, B.A. Lepanto Bldg. Paseo de Roxas, Makati City Attention: Atty . Wilhelmina Chavez-Litam Asst. Manager-Legal Department Gentlemen : This refers to your letter dated April 11, 1995 requesting in effect, for a certification that the transfer of the shares by way of property dividends is not subject to capital gains tax. llcd It appears that Guoco Land (Philippines), Inc. (GLPI) is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines; that GLPI is the registered owner of Three Hundred Fifty Thousand Six Hundred Ninety Five (350,695) shares of stock of First Lepanto Taisho Insurance Corporation (FLTIC); that on October 11, 1994, the Board of Directors of GLPI declared the shares as property dividends to Guoco Holdings Philippines, Inc. (GHPI), as the holder of 99.9% of the outstanding capital stock of GLPI and with the other stockholders to be paid the equivalent value thereof in cash; that on November 16, 1994, the stockholders of GLPI unanimously approved and ratified the declaration of property dividends to GHPI and the payment to the other stockholders of the equivalent value thereof in cash; that in a letter dated February 1, 1995, the Securities and Exchange Commission (SEC) informed GLPI that the declaration of property dividends of FLTIC and cash dividends amounting to Three Hundred Ninety Eight Thousand Two Hundred Pesos (P398,200.00) payable to all stockholders of record as of December 5, 1994 has been duly noted and made part of the records of GLPI on file with the SEC. In reply, please be informed that the property dividends in the form of shares of stock which shall be received by GHPI from GLPI shall not be subject to tax pursuant to Section 24(e)(4) of the Tax Code of 1977 (now Section 27(D)(4) of the Tax Code of 1997). Furthermore, under Section 24(B)(2) of the Tax Code of 1997, income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed as cash and/or property dividends on or after January 1, 1998, be subject to tax on dividends. The property dividends shall be recorded at their book value in the books of both the issuing corporation and the recipient stockholder. (BIR Ruling No. DA-292-97 dated August 28, 1997) llcd On the other hand, GLPI shall not be subject to any income or capital gains tax on the difference between the fair market value and the book value of the shares of stock declared and distributed as property dividends. (BIR Ruling No. DA-263-97 dated August 6, 1997). This is so because there is no realized gain if the value used at the time of distribution is the book value. A company 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. [General Utilities and Operating Co. v. Helvering, 296 U.S. 200-207] The documentary stamp tax on the Deed of Assignment executed by and between GLPI and GHPI covering the shares of stock declared as property dividends shall be due and payable on the day of execution of said deed pursuant to Sec. 176 of the Tax Code, as amended. 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)