Punongbayan & Araullo

December 27, 2007 BIR RULING [DA-683-07] DA 323-06 Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Fulvio D. Dawilan Tax Partner Gentlemen : This refers to your letter dated July 30, 2007 stating that your client, Riofil Corporation, is a domestic corporation organized and existing under the laws of the Philippines with principal office address at Suite 2802 Antel Global Corporate Center, Doa Julia Vargas Avenue, Ortigas Center, Pasig City; that on the other hand, JFE Civil Engineering and Construction Corporation (JFE Civil Engineering), a corporation organized and existing under the laws of Japan, is the direct and beneficial owner of 40% of the capital stock of Riofil Corporation; that JFE Civil Engineering is 100% owned by JFE Steel Corporation (JFE Steel), another corporation organized and existing under the laws of Japan; that in turn, JFE Steel is 100% owned by JFE Holdings, Inc., also a corporation organized and existing under the laws of Japan; that JFE Holdings, Inc. is owned by 365,524 stockholders, including 360,395 individuals; that the remaining shares of the Riofil Corporation are owned by three (3) individuals; and that the 40% shares owned by JFE Civil Engineering plus the shares directly held by any of the 3 individuals would total to at least 50% of the total shares of Riofil Corporation. Based on the foregoing representations, you now request for confirmation of your opinion that pursuant to the "grandfather rule" under the Corporation Code of the Philippines, Riofil Corporation is a publicly-held corporation, and hence, exempt from the improperly accumulated earnings tax (IAET). In reply thereto, please be informed that Section 29 (A) and (B) of the Tax Code of 1997 on the imposition of IAET, states that "(A) In General. In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. (B) Tax on Corporation Subject to Improperly Accumulated Earnings Tax. (1) In General. The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. (2) Exceptions. The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-listed corporations;" This kind of tax is being imposed in the nature of a penalty to the corporation for the improper accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation. However, the IAET shall not apply to, among others, publicly-held corporations. EDHTAI Furthermore, Section 4 of Revenue Regulations No. 2-2001, "Implementing the Provision on Improperly Accumulated Earnings Tax under Section 29 of the Tax Code of 1997," provides: "For purposes of these Regulations, closely-held corporations are those corporations at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held corporations." For purposes of determining whether the corporation is a closely-held corporation, it is provided that stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries. Thus, in BIR Ruling No. 025-2002 dated June 25, 2002 and later reiterated in BIR Ruling No. DA 085-03 dated March 20, 2003 , this Office ruled that such shares will be considered as being owned proportionately by the shareholders. The ownership of a domestic corporation for purposes of determining whether it is closely-held corporation or a publicly-held corporation is ultimately traced to the individual shareholders of the parent company. Accordingly, where at least 50% of the outstanding capital or at least 50% of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by at least 21 or more individuals, the corporation is considered publicly-held corporation as the term is defined in Revenue Regulations No. 2-2001. SUCH BEING THE CASE, the ownership of a domestic corporation (like Riofil Corporation) for purposes of determining whether it is a closely-held corporation or a publicly-held corporation is ultimately traced to the individual shareholders of the ultimate parent-company. Since Riofil Corporation is 40% owned by JFE Civil Engineering, which is an indirectly wholly-owned subsidiary of JFE Holdings, Inc., the 40% shares of Riofil Corporation will be considered as being owned proportionately by JFE Holdings, Inc. shareholders. In applying the foregoing principles, it is clear that Riofil Corporation is a publicly-held corporation. Riofil Corporation is 40% indirectly-owned subsidiary of its ultimate parent company, JFE Holdings, Inc., on account of the following: (a) 40% of the capital stock of the Riofil Corporation is owned by JFE Civil Engineering; (b) 100% of the capital stock of JFE Civil Engineering is owned by JFE Steel; (c) 100% of the capital stock of JFE Steel is owned by JFE Holdings, Inc. Because the shares of JFE Holdings, Inc., the ultimate parent company of Riofil Corporation, are owned by more than 20 individuals, 40% of Riofil Corporations' shares is indirectly owned by more than 20 individuals. It follows that at least 50% of the capital stock of Riofil Corporation, comprising the 40% shares indirectly owned by stockholders of JFE Holdings, Inc., plus any shares directly owned by an individual, is owned by more than 20 individuals. Under the premises, Riofil Corporation qualifies as a publicly-held corporation not subject to the improperly accumulated earnings tax. WHEREFORE, in view of the foregoing , this Office holds that Riofil Corporation cannot be considered a closely-held corporation but rather a publicly-held corporation, and therefore, is exempt from the imposition of IAET under Section 29 (B) (2) (a) of the Tax Code of 1997. 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. HATEDC Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service