BIR Ruling [DA-632-04]

December 14, 2004 BIR RULING [DA-632-04] Sections 28 (B) (1); 42 (A), 175 277-93; DA-409-04 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. E.C. Alcantara Gentlemen : This refers to your letter dated December 6, 2004 on behalf of your client, Sithe Asia Holdings, Limited ("SAHL"), the pertinent portion of which is quoted as follows: "Sithe Asia Holdings Limited (SAHL) is a corporation duly organized and existing under the laws of Cayman Islands with business office address at 42/F Cheung Kong Center, No. 2 Queen's Road Central, Hong Kong. It is not engaged in trade or business in the Philippines and does not maintain any branch office or any other place of business in the Philippines. Marubeni Corporation (MC) is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal office address at 5-7 Hommachi 2-Chome, Chiroku, Osaka, Japan. It is licensed to engage in business under Philippine laws through its Philippine branch office as per Certificate of Registration issued by the Securities and Exchange Commission (SEC) dated March 20, 1997. MC owns shares of stock in SAHL equivalent to 55.83% of SAHL's outstanding and subscribed capital stock. These investments were made by MC on its own, independently of its Philippine branch office. On the other hand, Sithe Philippines Holdings, Inc. (SPHI) is a corporation duly organized and existing under the laws of the Republic of the Philippines with principal address at 36th Floor, Tower 1, The Enterprise Center, 6766 Ayala Avenue, Makati City, 1200 Philippines. SAHL owns 685,045 common shares and 226,581 preferred shares of stock in SPHI, equivalent to 99.99% of SPHI's outstanding and subscribed capital stock. SAHL plans to distribute its SPHI shares to MC, in either of the following manner: (a) the entire SPHI shares of stock to be distributed by way of property dividends or as return of capital to MC; or (b) a number of the SPHI shares of stock to be distributed by way of property dividends and the remaining SPHI shares to be distributed as return of capital to MC." Based on the foregoing, you now request a confirmation of your opinion that: On Property Dividends 1. The property dividends to be issued by SAHL to its stockholder, Marubeni Corporation ("MC"), also a non-resident foreign corporation, in the form of shares of stock of SAHL in Sithe Philippines Holdings, Inc. ("SPHI"), shall not be considered as income derived from the Philippines since less than 50% of the worldwide income of SAHL in the three-year period preceding the dividend declaration is derived within the Philippines, pursuant to Section 42(A) of the 1997 Tax Code, as amended; 2. SAHL, in transferring and declaring its SPHI shares as property dividends in favor of Marubeni Corporation, does not receive any consideration and realize no taxable income with such property dividends declaration; and 3. The transfer of SPHI shares of stock shall be subject to documentary stamp tax (DST) at the rate of P0.75 per P200 par value or fractional part thereof under Section 175 of the 1997 Tax Code, as amended by the New DST Law (Republic Act No. 9243); On Return of Capital 1. The transfer of SPHI shares by SAHL to MC in exchange for SAHL shares that will be surrendered by MC as a result of the capital reduction to be undertaken by SAHL shall not be considered as a taxable event in the Philippines as such a transfer is not considered a sale of these assets; 2. The surrender of SAHL shares by MC to SAHL and the receipt of these surrendered shares by SAHL shall not be subject to any Philippine tax since SAHL is merely performing the ministerial function of implementing the reduction in the capital stock and, therefore, it is not taking title to nor is it receiving any value, for the surrendered shares; 3. The receipt by MC of the SPHI shares of stock owned by SAHL as return of its capital investment in SAHL shall not be subject to Philippine income tax since any gain therefrom is derived from sources outside the Philippines; 4. The transfer of SPHI shares of stock of shall be subject to documentary stamp tax (DST) at the rate of P0.75 per P200 par value or fractional part thereof under Section 175 of the 1997 Tax Code, as amended by RA 9243; and 5. Upon presentation of the proof of payment of DST, the Corporate Secretary of SPHI can record the transfer of the SPHI shares from SAHL to MC in the Stock and Transfer Book of SPHI, and after cancellation of the stock certificates issued in the name of SAHL, issue new stock certificates in the name of MC as transferee thereof. In reply, please be informed as follows: On the property dividend declaration by SAHL to MC of the SPHI shares For dividends issued by a non-resident foreign corporation, such dividends shall be considered as income derived from the Philippines and therefore subject to Philippine tax only when at least 50% of the gross income of the issuing corporation for the three-year period preceding the year of distribution is derived from sources within the Philippines, in accordance with Section 42(A) of the 1997 Tax Code, as amended. Based on the financial statements of SAHL for the years 2002 and 2003 and the latest interim financial statements for 2004, SAHL's worldwide income is US$ 170,081,043.18 while its Philippine derived income is only US$ 11,866,714.78. Thus, the proportion of SAHL's Philippine-derived income to its worldwide income is only 7%. Accordingly, the dividends to be issued by SAHL are not considered as income derived, within the Philippines, and are therefore not subject to Philippine tax. We also confirm that SAHL, in declaring property dividends in favor of MC, will not realize any taxable income which can be subject to income tax or capital gains tax as SAHL does not receive any consideration and realize no taxable income with the property dividends declaration. 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. ( BIR Ruling No. 25(b)(5)(B) 324-87-010-89 dated February 1, 1989 quoting General Utilities and Operating Co. V Halvering 296 U.S. 200-207 ). In BIR Ruling [DA-594-10-07-99] involving property dividends consisting of shares of stock of Motorola Philippines Inc. (MPI) declared by MIDC in favor of MINC, MIDC and MINC being both nonresident corporations, this Office ruled that: "We also confirm that on the part of MIDC, the transfer of the MPI shares by way of property dividend is not considered a sale or disposition within the meaning of Section 40 of the Tax Code of 1997, considering that in the transfer of the MPI, shares, MIDC does not receive any consideration nor does MIDC realized any income. ( BIR Ruling No. 277-93 dated June 28, 1993; BIR Ruling UN-024-1-11-95, BIR Ruling UN-047-1-27-95 )" On the return of capital by SAHL to MC in the form of SPHI shares SAHL plans to reduce its capital by returning to MC its capital investment in the form of SPHI shares. A reduction in capital is considered as. partial liquidation of a company ( BIR Ruling [DA-356-03] dated October 10, 2003, BIR Ruling [DA-208-03] dated July 4, 2003 ). To implement the capital reduction or partial liquidation, SAHL will return the capital investment of MC in the form of SPHI shares. This Office hereby confirms that such a transfer is not considered a taxable event in the Philippines since a liquidating corporation does not realize gain or loss in the distribution of its remaining assets to its shareholders as a consequence of its liquidation. The transfer by the liquidating corporation of its remaining assets to its shareholders is not considered a sale of these assets ( BIR Rulings [DA-409-04], July 28, 2004; [DA-463-03], December 5, 2003; [DA-317-03], September 26, 2003; [DA-053-02], March 27, 2002; [DA-214-96], June 26, 1996 ). Moreover, SAHL is not subject to any Philippine tax for receiving from MC the SAHL shares as a result of the capital reduction or partial liquidation. It is likewise not subject to Philippine tax for canceling the surrendered SAHL shares. In both cases, it is merely performing the ministerial function of implementing the reduction in the capital stock and, therefore, SAHL is not taking title to nor is it receiving any value for the surrendered shares. The reduced shares of SAHL does not represent value, since, it is merely the documentary evidence of the reduced capital stock and will cease to exist after their cancellation. The BIR has ruled that a company under partial liquidation is not subject to any tax for receiving from its stockholders surrendered shares and for canceling the reduced shares ( BIR Ruling [DA-214-96], June 26, 1996; BIR Ruling No. 171-92, May 28, 1992 ). In case MC will realize a gain from its receipt of SPHI shares from SAHL, such gain is derived from sources outside the Philippines, and, consequently, is not subject to Philippine income tax considering that MC and SAHL are both non-resident foreign corporations taxable only on income derived from sources within the Philippines ( BIR Rulings [DA-463-03], December 5, 2003; [DA-317-03], September 26, 2003; [DA-053-02], March 27, 2002 ). CacISA In BIR Ruling [DA-053-02] dated March 27, 2002 , this Office held that: "CAH as the shareholder of Maya will realize a capital gain or loss on its receipt of the liquidating dividends consisting of the shares in Bedrock and Sandstone. The transfer of shares by a stockholder to a corporation under liquidation in exchange for assets of the liquidated corporation is considered a sale ( Wise & Co. v. Meer, 78 Phils. 655 [1947] ). However, any gain derived by CAH arising from the transfer of the said shares in case of liquidation is considered gain derived from sources outside the Philippines since Maya, the entity being liquidated, is a non-resident foreign corporation. As a non-resident foreign corporation, CAH is taxable only on income derived from sources within the Philippines ( BIR Ruling No. 252-91 dated November 20, 1991 ). Accordingly, the receipt by CAH of the Bedrock and Sandstone shares as liquidating dividends is not subject to Philippine income tax." It is understood, however, that the transfer of SPHI shares by SAHL to MC, either by way of property dividend or return of capital, is subject to documentary stamp tax (DST), pursuant to Section 175 of the 1997 Tax Code, as amended by Republic Act No. 9243, otherwise known as the New DST Law. Upon proof of payment of the DST, the corporate secretary of the SPHI may already register the transfer of the shares and cancel and issue new stock certificates in the name of MC. 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group