BIR Ruling [DA-660-04]

December 22, 2004 BIR RULING [DA-660-04] RB 1-2003 ASB Land, Inc. ASB Center 114 Benavidez St., Legaspi Village Makati City Attention: Atty. Rolando P. Domingo Senior Vice-President Gentlemen : This refers to your letter dated November 18, 2004 requesting for a confirmation of your opinion that the net operating loss of both ASB Land, Inc. (ASBLI) and ASB Holdings, Inc. (ASBHI) after a statutory merger, may be carried over and allowed as deductions from the gross income of the surviving corporation under Revenue Regulations (RR) No. 14-2001. It appears that ASBHI and ASBLI are both domestic corporations engaged in real estate development and are organized and existing under and by virtue of the laws of the Philippines with principal offices at ASB Center Building, 114 Benavidez Street, Legaspi Village, Makati City; that both ASBHI and ASBLI will effect a statutory-merger in accordance with the provisions of Sections 76 to 80 of the Corporation Code of the Philippines where ASBLI is the surviving corporation. The proposed merger shall be undertaken to strengthen the base of the absorbing corporation to better position itself in its real estate business and to give it more flexibility in its objective of expanding its marketing thrusts in the industry and to unify the two corporations so that all the functions thereafter will be directly under one management and with one corporate objective and to provide economies of scale and to attain efficiency in the process of merger. The business activities of both companies are said to complementary. On the bases of the foregoing, you now request for a confirmation of your opinions that: 1. The net-operating losses of ASBLI are allowed as deductions from its gross income under Section 2.2 of Revenue Regulations (RR) No. 14-2001, since it is the surviving entity. 2. The net operating losses of ASBHI may be carried over by ASBLI and utilized as a deduction from its gross income, since as a result of the merger, there has been no substantial change in the ownership of the business or enterprise or not less than 75% in nominal value of the outstanding issued shares of the corporation claiming the deduction are held by or on behalf of the same persons after the merger. In reply, please be informed as follows: 1. Pursuant to Sec. 2.2 of RR 14-2001 dated October 10, 2001, Net Operating Loss Carry-Over (NOLCO) shall be allowed as a deduction from the gross income of the same taxpayer who sustained and accumulated the net operating loss regardless of the change in its ownership, and said rule shall also apply in the case of a merger where the taxpayer is the surviving entity. 2. The provision of Sec. 2.3 of said RR 14-2001 states that unless otherwise provided, the NOLCO of the taxpayer shall not be transferred or assigned to another person, whether directly or indirectly, but not limited to, the transfer or assignment thereof through a merger, consolidation or any form of business combination of such taxpayer with another person. Furthermore, the aforesaid Regulations provides that NOLCO shall also be allowed if there has been no substantial change in the ownership of the business or enterprise in that not less than 75% in nominal value of outstanding issued shares or not less than 75% of the paid up capital of the corporation, if the business is in the name of the corporation, is held by or on behalf of the same persons. However, under Revenue Bulletin No. 1-2003 dated July 14, 2003, one of the instance identified as a "No-Ruling Area" is the determination of whether there is/there is no substantial change in the ownership or enterprise (whether as a result of a merger or otherwise) for purposes of applying the NOLCO provision under Section 34(D)(3) of the Tax Code of 1997, as defined under RR No. 14-2001. You are requesting that the NOLCO of ASBLI, as well as the aggregate NOLCO of ASBHI be carried over to ASBLI and utilized as a deduction from its gross income, inasmuch as there is a determination as to whether there is a substantial and effective change in ownership of ASBLI, this Office is constrained not to rule on the applicability of NOLCO as a deduction from gross income based on the aforestated Revenue Bulletin. Accordingly, this Office decline to rule further considering that the subject matter falls within the list of No-Ruling Areas. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service