SGV & CO

December 14, 2007 BIR RULING [DA-654-07] DA 186-06 SGV & CO 6760 Ayala Avenue Makati City Attention: R.C. Vinzon Gentlemen : This refers to your letter dated October 19, 2007 stating that your client, ATR KimEng Capital Partners, Inc. (CPI), is a domestic corporation which offers investment banking services, including underwriting, financial advisory, fixed income and trust services; that it is a wholly owned subsidiary of ATR KimEng Financial Corporation (Financial), which in turn, is a diversified financial services company organized and existing under the laws of the Philippines; that CPI owns shares in another domestic entity, AsianLife & General Assurance Corporation (ALGA), which offers various insurance products ranging from ordinary life insurance to group life insurance and group health insurance; that CPI also owns shares in Sucat Land Corporation (SLC), which is a property holding company; that as part of a group restructuring effort, CPI intends to declare its shares in both ALGA and SLC as property dividend to its parent company and sole stockholder, Financial; that CPI's investment in the shares of ALGA and SLC are in the nature of capital assets; and that these do not constitute stocks in trade of CPI nor are they primarily held for sale or for lease in the ordinary course of CPI's business. CTEDSI Based on the foregoing representations, you now request confirmation of your opinion that 1. The property dividends to be declared by CPI to its sole stockholder, Financial, is not subject to income tax, and consequently, to withholding tax; 2. The property dividends to be declared by CPI to its sole stockholder, not consisting of stock in trade of properties held for sale or for lease, but consisting of capital assets in the form of investments in shares of stock of its affiliate companies, shall not be subject to VAT; and ISTECA 3. The property dividends to be declared by CPI to its sole stockholder, Financial, shall be subject to DST at the rate of P0.75 on each P200, or fractional part thereof, of the par value of the shares of stock of ALGA and SLC, as the investee companies, respectively. In reply thereto, please be informed as follows: 1. Section 27 (D) (4) of the Tax Code of 1997 provides that "Sec. 27. Rates of Income Tax on Domestic Corporations . (D) Rates of Tax on Certain Passive Incomes . (4) Intercorporate Dividends . Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax." DEHaAS The rationale of the above-mentioned provision has already been elucidated by this Office in BIR Ruling No. DA030-06 dated February 2, 2006, as follows: "Accordingly, the cash and property dividends declared and distributed by CII to its stockholders which are domestic corporations shall not be subject to income tax pursuant to Section 27(D)(4) of the Tax Code of 1997. Consequently, the subject cash dividends in the amount of P8,120,000.00 and the property dividends in the amount of P5,500,000.00 shall not be subject to any withholding tax. . . ." Accordingly, the property dividends to be declared by CPI to its sole stockholder, Financial, is not subject to income tax and consequently to withholding tax. DHEcCT 2. Section 4.106-7 of Revenue Regulations No. 16-2005, as amended by Revenue Regulations No. 4-2007, implementing Republic Act (R.A.) No. 9337, provides that "Sec. 4.106-7. Transactions Deemed Sale . (a) The following transactions shall be 'deemed sale' pursuant to Section 106(B) of the Tax Code: (2) Distribution or transfer to: (i) Shareholders or investors share in the profits of VAT-registered person; Property dividends which constitute stocks in trade or properties primarily held for sale or lease declared out of retained earnings on or after January 1, 1996 and distributed by the company to its shareholders shall be subject to VAT based on the zonal value or fair market value at the time of distribution, whichever is applicable." SEcADa In the instant case, since the property dividends consist of CPI's investments in shares of stock in its two (2) affiliates, ALGA and SLC, and are not in the nature of stocks in trade or property held for sale or lease, such dividends should not be subject to VAT. This is fortified in BIR Ruling No. DA186-06 dated March 28, 2006 , where it was held that "Inasmuch as the real properties distributed as property dividends do not constitute stocks in trade are not primarily held for sale or for lease in the ordinary course of business, TDC shall not be subject to VAT on its distribution of property dividends in favor of its stockholders." TSEcAD Consequently, the property dividends to be declared by CPI to its sole stockholder, not consisting of stock in trade of properties held for sale or for lease but consisting of capital assets, shall not be subject to VAT. 3. Section 175 of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9243, provides that " Stamp Tax on Sales, Agreement to Sell, Memoranda of Sales, Deliveries or Transfer of Shares of Certificates of Stock . On all . . . transfer of shares or certificates of stock in any association, company, or corporation, . . ., there shall be collected a documentary stamp tax of Seventy Five Centavos (P0.75) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such stock . . . ." Such being the case, this Office holds that the property dividends to be declared by CPI to its sole stockholder, Financial, shall be subject to DST at the rate of P0.75 on each P200, or fractional part thereof, of the par value of the shares of stock of ALGA and SLC, respectively. TASCEc WHEREFORE, this Office hereby confirms your opinion that 1. The property dividends to be declared by CPI to its sole stockholder, Financial, is not subject to income tax, and consequently, to withholding tax; 2. The property dividends to be declared by CPI to its sole stockholder, not consisting of stock in trade of properties held for sale or for lease, but consisting of capital assets in the form of investments in shares of stock of its affiliate companies, shall not be subject to VAT; and 3. The property dividends to be declared by CPI to its sole stockholder, Financial, shall be subject to DST at the rate of P0.75 on each P200, or fractional part thereof, of the par value of the shares of stock of ALGA and SLC, as the investee companies, respectively. 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. cCTESa Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service