Quasha Ancheta Peña & Nolasco Lawyers

January 15, 2009 BIR RULING [DA-(C-002) 022-09] 24; 98; 176; DA-038-07 Quasha Ancheta Pea & Nolasco Lawyers Don Pablo Building, 114 Amorsolo St. 1229 Makati City Attention: Atty. Shirley D. Sison Gentlemen : This refers to your letter dated September 19, 2003 requesting on behalf of your client, Trans World Trading Co., Inc., ("TWT") for confirmation of your opinion that the transfer by a trustee of shares of stock held in trust for the trustor without consideration does not involve any actual sale, conveyance, barter, exchange or donation and thus, is not subject to capital gains tax, donor's tax and documentary stamp tax. SIcEHC The facts, as represented, are as follows: 1. TWT is a domestic corporation duly registered with the Securities and Exchange Commission. It is engaged in business primarily as general merchant of industrial and chemical materials and supplies. TWT is registered with the BIR and was issued TIN No. 000-316-287-000. TWT is likewise registered as a Large Taxpayer and was issued Certificate of Registration No. 000015792 dated June 30, 1994 by the BIR Large Taxpayer District Office. 2. Joseph K.H. Uy is a stockholder of TWT. He sat as Director and has been Chairman of the Board since 1974. 3. From 1977 to 1978, TWT subscribed to a total of Four Hundred Sixty-Four Thousand Four Hundred Seventy-five (464,475) shares of stock of YKK Zipper Philippines, Inc. ("YKK"). During the same period (1977-1978), TWT issued four (4) checks totaling Four Hundred Sixty-Four Thousand Four Hundred Seventy-Five Pesos (P464,475.00) as full payment for the YKK shares. However, in July 21, 1978, a Declaration of Trust was executed whereby Joseph K. H. Uy acknowledged and declared that he is holding the said YKK shares of stock in trust for and for the sole benefit of TWT and that any consideration for the said shares were paid by TWT. On the basis of said Declaration of Trust, the subscriptions to the YKK shares and the corresponding stock certificates were placed in the name of Mr. Joseph K. H. Uy. 4. In 1989, TWT again subscribed to a total of Three Million Five Hundred Thirty-Five Thousand Five Hundred Twenty-Five (3,535,525) shares of stock of YKK. TWT issued two (2) checks totaling Three Million Five Hundred Thirty-Five Thousand Five Hundred Twenty-Five (P3,535,525.00) as full payment for these additional YKK shares. Once more the subscription to the additional YKK shares and the corresponding stock certificates were placed in the name of Mr. Joseph K.H. Uy pursuant to a Declaration of Trust dated May 10, 1989. AHSaTI 5. By 1989, a total of Four Million (4,000,000) shares of stock of YKK, which is beneficially owned by TWT, were issued in the name of Joseph H.K. * Uy. 6. In August 1989, Mr. Uy executed a "Transfer and Assignment of Shares of Stock" in favor of TWT. In this document, Mr. Uy acknowledged that the YKK shares registered in his name were purchased and paid for with money belonging to TWT. In the same document, Mr. Uy, as the Trustee, recognized the rights, interests and benefits of the Trustor, TWT, over the YKK shares as the beneficial owner thereof. He added that dividends pertaining to the said shares, although paid in his name, were turned over to TWT. Mr. Uy declared that he and TWT had agreed that the shares of stock, including the dividends, be registered in the books of YKK under the name of the true and beneficial owner, TWT, instead of Joseph K.H. Uy. He requested that certificates issued under the name of Joseph K.H. Uy be cancelled and new ones be issued in the name of TWT. 7. Despite the execution of the above-mentioned deed by Mr. Uy, on September 17, 1999, YKK issued a stock certificate for Eight Million (8,000,000) shares in the name of Joseph K.H. Uy, representing stock dividends. 8. Thus, by 1999, a total of Twelve Million (12,000,000) shares of stock of YKK ("YKK Shares"), were issued in the name of Joseph K.H. Uy although the actual owner and ultimate beneficiary thereof is TWT. 9. On May 6, 2003, Mr. Uy executed a "Deed of Assignment" in favor of TWT. Mr. Uy once more acknowledged that he is a mere trustee of the YKK Shares with TWT as the trustor-beneficial owner. That although the YKK Shares and the corresponding dividends were registered in his name, they were, in fact, purchased and paid for with money belonging to TWT, the Trustor. Mr. Uy agreed that the YKK Shares should be registered under the name of its true and beneficial owner, TWT, instead of Joseph K.H. Uy in the books of YKK. In reply, please be informed that your opinion is hereby confirmed as follows: 1. While Section 24 (C) of the Tax Code of 1997, as amended, generally imposes a final tax at the rates of 5% and 10% upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange, the rule does not apply in the instant case considering that there is no sale, barter or exchange of the YKK shares of stock since TWT is the real owner of the subject shares of stock which Mr. Uy held as a trustee. Accordingly, the transfer of the YKK shares of stock from the Trustee, Mr. Uy, to the Trustor, TWT, the real owner thereof, without monetary consideration pursuant to a "Declaration of Trust" and by virtue of a "Transfer and Assignment of Shares of Stock", is not subject to capital gains tax. (BIR Ruling No. DA-142-2003 dated May 5, 2003) aASEcH Furthermore, in BIR Ruling No. 031-99 dated March 19, 1999, this Office has already ruled that ". . . the conveyance by the Trustee in favor of the Trustor of the subject properties which the former acquired by virtue of the Trust Agreement is not to be treated as another transfer separate and distinct from the sale between the original owner and the Trustee. The conveyance is merely to be treated as a continuation and confirmation of title in favor of the ultimate and real beneficiary of the subject properties." 2. Well-settled in our jurisprudence is the fact that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor, (2) the increase in the patrimony of the donee; and (3) the intent to do an act of liberality (animus donandi) . Clearly, there is no intention on the part of Mr. Uy to donate to TWT the YKK shares of stock which he held in trust for the latter. Thus, the aforesaid transfer and/or assignment of the subject shares of stock will not be subject to gift tax since there is no intention to donate, and the transaction is merely to be treated as a continuation and confirmation of ownership in favor of the ultimate and real beneficiary of the YKK shares of stock. 3. Finally, the Transfer and Assignment of Shares of Stock and Deed of Assignment are not subject to the documentary stamp tax imposed under Section 175 of the Tax Code of 1997, as amended, but only to the documentary stamp tax on certificates under Section 188 of the same Code, supra. (BIR Ruling No. 115-94) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service