Aranas Consunji Barleta

August 22, 2008 BIR RULING [DA-(C-046) 166-08] DA318-05 Aranas Consunji Barleta Unit 106 G/F Le Metropole Building Tordesillas cor. De La Costa Street Salcedo Village, Makati City Attention: Atty. Casey M. Barleta Gentlemen : This refers to your letter dated July 21, 2008 stating that your client, Sumifru Singapore Pte. Ltd. (SFS), is a non-resident foreign corporation duly organized and existing under the laws of Singapore with office address at 3 Phillip Street #08-04 Commerce Point Singapore; that on the other hand, Davao Fruits Corporation (DFC) is a domestic corporation duly organized and existing under the laws of the Philippines with principal office address at AMS Compound, F. Torres Street, Davao City; that DFC is engaged in the production and exportation of Cavendish bananas through contract growing in the Philippines; that DFC's present capital structure consists of the following: Class/Series of Shares Issued Shares Par Value per Share Preferred 7,000 P100,000.00 Common 37,094,370 10.00 that SFS holds 7,000 redeemable preferred shares of DFC; that the foregoing 7,000 redeemable shares held by SFS will be converted into 700,000,000 common shares with a par value of P1.00; and that DFC shall issue common shares equal the total par value of the preferred shares redeemed. Based on the foregoing representations, you now request for confirmation of your opinion that 1. The conversion of DFC preferred shares to common shares is not tantamount to redemption but is in the nature of a mere recapitalization to which no gain or loss is recognized. Thus, the said conversion is not subject to capital gains tax; 2. SFS will not be subject to any tax on the conversion of its DFC preferred shares to common shares because SFS merely changed the form of its shareholdings in DFC and there was no change of its proportionate interest in DFC; and 3. The conversion of preferred shares to common shares by DFC is not subject to documentary stamp tax as the said conversion does not partake of the issuance of original shares of stock subject to documentary stamp tax under Section 174 of the Tax Code of 1997, as amended. DTaSIc In reply thereto, please be informed that your opinion is hereby confirm as follows 1. The conversion/reclassification of DFC's redeemable preferred shares to common shares is not subject to capital gains tax as the said reclassification or conversion is not tantamount to redemption from which capital gain or loss may be recognized. This is fortified in BIR Ruling No. DA030-05 dated January 24, 2005, where this Office ruled that "The conversion of the common shares into preferred shares shall not be subject to capital gains tax since the holders thereof merely change the form of their shareholdings from common shares to preferred shares and they do not realize any gain or economic benefit therefrom. (BIR Ruling No. DA141-99 dated March 9, 1999) The exchange of common shares into preferred shares qualifies as a mere recapitalization and no gain or loss is recognized therefrom. Recapitalization has been defined as a readjustment of existing interests in the rearrangement of the capital structure of the company, which generally are non-taxable to both the holders and the issuing corporation. (Mertens, Law of Federal Income Taxation, Section 43.105, pp. 164-166) " The above-cited ruling is in line with the Supreme Court Decision entitled "Commissioner of Internal Revenue vs. Court of Appeals, Court of Tax Appeals and A. Soriano Corporation, G.R. No. 108576 (20 January 1999)" , where it was recognized that no income was realized by the stockholders upon the reclassification of common shares into preferred shares since there was no change in the proportionate interest of the stockholders are the reclassification. Both classes of stocks had the same par value. There was no cash flow and the reclassification was a mere corporate paper transaction. Any difference in the market value of the shares would be immaterial at the time of the reclassification because no income was realized. There was only a modification of the subscribers' rights and privileges and this was not a flow of wealth for tax purposes. Thus, in applying the above-cited ruling together with the Supreme Court decision in the instant case, it is undisputed that SFS will only change the form of its shareholdings in DFC through the conversion of its preferred shares to common shares. Accordingly, SFS is deemed not to have realized any gain or economic benefit from the said conversion. 2. SFS does not realize any income from the conversion of DFC preferred shares to common shares since the transaction will not involve any cash flow and will not change the par value of the shares and the stockholder's proportionate interest in DFC. In other words, the total value of the issued/subscribed capital stock, after conversion, will remain the same since only the type of shares issued will change. DcSTaC Consequently, SFS will not be subject to any tax on the conversion of its DFC preferred shares to common shares because SFS merely changed the form of its shareholdings in DFC and without any change in its proportionate interest in DFC. 3. In BIR Ruling No. DA318-05, supra, it was likewise ruled that the conversion of the preferred shares into equivalent common shares does not partake of the issuance of original shares of stock and, hence, the same is not subject to documentary stamp tax under Section 175 of the Tax Code of 1997. Such being the case, the conversion of preferred shares to common shares by DFC is not subject to the documentary stamp tax prescribed under Section 175 of the Tax Code of 1997, as amended by R.A. No. 9243, as implemented by Revenue Regulations No. 13-2004. WHEREFORE, in view of the foregoing, this Office hereby confirms your opinion that 1. The conversion/reclassification of preferred shares to common shares by DFC is not tantamount to redemption but is in the nature of a mere recapitalization to which no gain or loss is recognized. Thus, the said conversion is not subject to capital gains tax. 2. SFS will not be subject to any tax on the conversion of its DFC preferred shares to common shares because SFS merely changed the form of its shareholdings in DFC and there was no change of its proportionate interest in DFC. 3. Finally, the conversion of preferred shares to common shares by DFC is not subject to documentary stamp tax as the said conversion does not partake of the issuance of original shares of stock prescribed in Section 175 of the Tax Code of 1997, as amended by R.A. No. 9243. AHCaED 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service