Quisumbing Torres Law Offices

June 22, 2009 BIR RULING [DA-(C-097) 311-09] Sec. 28 (B) (5) (c); Sec. 98; DA-406-07 Quisumbing Torres Law Offices 12th Floor, Net One Center 26th Street, cor. 3rd Avenue Crescent Park West, Bonifacio Global City Taguig City Attention: Atty. Dennis G. Dimagiba Atty. Kristine Anne V. Mercado Gentlemen : This refers to your letter dated 4 February 2009 requesting on behalf of your client, NIKE, Inc., confirmation of your opinion that the contribution by NIKE, Inc. of its shares of the capital stock of NIKE Philippines, Inc. to NIKE Laser Holding B.V. as part of the corporate reorganization involving the foregoing entities belonging to the same Group of Companies, with beneficial ownership of the shares of stock remaining within said group, is not subject to capital gains tax and donor's tax. Documents show that NIKE, Inc. is a corporation organized and existing under the laws of the State of Oregon, with principal business address at One Beaverman Drive, Beaverton, Oregon, U.S.A. NIKE, Inc. has ownership (direct or indirect) and ultimate voting control over several subsidiaries organized in other jurisdictions and belonging to the same Group of Companies (hereinafter collectively referred to as "NIKE Group"). These entities include: NIKE PHILIPPINES, INC. ("NIKE Philippines"), a corporation organized and existing under the laws of the Republic of the Philippines with SEC Reg. No. A199902790, and registered to engage primarily in and carry on the trade or business of manufacturing, importation, marketing and sale, on wholesale basis of sports and fitness footwear, apparel, accessories and equipment. HCETDS NIKE LASER HOLDING B.V. ("NIKE Laser"), a corporation organized and existing under the laws of the Netherlands. NIKE, Inc. is currently the beneficial owner of 100% of the capital stock of NIKE Philippines, consisting of 77,800 common shares ("NIKE Philippines Shares") , including five (5) shares held by individual nominees in trust for and on behalf of NIKE, Inc. Prior to the restructuring exercise, NIKE, Inc. is also the direct owner of 100% of the common stock of NIKE Laser. EcSCAD With an effective date of 19 December 2008, NIKE, Inc. and NIKE Laser entered into a Capital Contribution Agreement as part of efforts to effect an internal legal restructuring involving NIKE, Inc., as the Parent, and certain of its subsidiaries worldwide. Under the Agreement, NIKE, Inc. agreed to contribute its rights, title and interests in the NIKE Philippines Shares (the "Interest") to NIKE Laser in exchange for one (1) share in the latter's capital stock, whereby any surplus value of the Interest above the nominal value of the share to be issued by NIKE Laser shall be recorded as contributed surplus. Immediately after the transfer of the NIKE Philippines Shares, NIKE, Inc. continued to be the owner of 100% of the issued and outstanding shares of the capital stock of NIKE Laser. Thus, as a result of the foregoing share contribution, NIKE Laser will become the new direct owner of the NIKE Philippines Shares. Beneficial ownership in the NIKE Philippines Shares will remain in the NIKE Group through NIKE Laser, whose ultimate parent is NIKE, Inc. In support of your request, you attach copies of the following documents: 1. Diagram/structure chart showing the relationship of the relevant members of the NIKE Group before and after the contribution of the NIKE Philippine Shares; 2. SEC-certified copy of the Articles of Incorporation of NIKE Philippines; 3. NIKE Philippines Certificates of Stock Nos. 19, 20, 21, 22, and 23 evidencing ownership of 77,795 NIKE Philippines shares by NIKE, Inc. and 5 NIKE Philippines shares by individual nominees of NIKE, Inc.; cHCIDE 4. Certificate of Incorporation of NIKE, Inc.; 5. Deed of Incorporation of NIKE Laser; 6. Trade Register Extract of NIKE Laser; 7. Shareholder Register of NIKE Laser; and 8. Duly authenticated/notarized copies of the Capital Contribution Agreement dated 19 December 2008 between NIKE, Inc. and NIKE Laser with supporting documents attached thereto. In reply, please be informed as follows: 1. The contribution of the NIKE Philippines Shares by NIKE, Inc. to NIKE Laser is not subject to the capital gains tax levied under the National Internal Revenue Code of 1997 ("NIRC") on the sale, exchange or other disposition of shares of stock in a Philippine corporation not traded through the stock exchange. SEIcAD Under Section 28 (B) (5) (c) of the NIRC, a final tax is generally imposed on net capital gains realized during the taxable year by a non-resident foreign corporation from the sale, barter, exchange or other disposition of shares of stock in a Philippine corporation (except shares sold or disposed through the stock exchange). The capital gains tax is imposed at a rate of 5% of net capital gains not exceeding the first PHP100,000.00, and 10% of net capital gains in excess of the first PHP100,000.00. In order for capital gains tax to accrue, there must be a transfer by the non-resident foreign corporation of beneficial ownership of the shares in the Philippine corporation. The transfer of beneficial ownership is indispensable for any capital gains to be imputed on the non-resident foreign corporation as a result of the share transfer. Thus, in instances where shares of stock in a Philippine corporation are transferred by a non-resident foreign corporation to another non-resident foreign corporation belonging to the same group of companies, pursuant to a legitimate worldwide corporate reorganization, this Office has consistently ruled that the share transfer will not be subject to capital gains tax since there is no effective transfer of beneficial ownership of the shares in the Philippine corporation (BIR Ruling DA-642-04; DA-475-05; DA-524-05; DA-088-06; DA-632-06; DA-336-07; DA-406-07) . In the instant case, the transfers by NIKE, Inc. of the NIKE Philippines Shares, pursuant to its Agreement with NIKE Laser, will not result in the transfer of beneficial ownership in the NIKE Philippines Shares outside the NIKE Group, to which NIKE, Inc., NIKE Philippines, and NIKE Laser all belong, with NIKE, Inc. as the ultimate parent company. NIKE, Inc. will maintain such beneficial ownership in the NIKE Philippines Shares through its subsidiary, NIKE Laser. Furthermore, the transfer by NIKE, Inc. of the NIKE Philippines Shares is being undertaken pursuant to an internal legal restructuring involving the Parent company (Nike, Inc.) and certain of its subsidiaries. Under these premises, there will be no effective transfer of beneficial ownership of the NIKE Philippines Shares from which NIKE, Inc. can be considered to have realized any capital gains that will be subject to tax. 2. The foregoing contributions of the NIKE Philippines Shares are not subject to the donor's tax levied under the NIRC. Under Section 98 of the NIRC, a donor's tax is generally imposed on the transfer by any person, resident or non-resident, of property by gift. The donor's tax applies, whether such transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. EICSTa In order that donor's tax will accrue in a direct gift, the element of donative intent is indispensable. Thus, in cases where the transfer of property is made primarily for business considerations and there is no donative intent on the part of the transferor, this Office has also consistently ruled that donor's tax should not be levied on such transfer (BIR Ruling DA-475-05; DA-524-05; DA-088-06; DA-406-07). In the instant case, the transfer by NIKE, Inc. of the NIKE Philippines Shares is without monetary consideration but is, rather, an additional contribution to the capital stock of NIKE Laser. It cannot be said that NIKE, Inc. was motivated by any donative intent in transferring and contributing the NIKE Philippines Shares. On the contrary, NIKE, Inc. desires to initiate the transfer of the NIKE Philippines Shares pursuant to an internal legal restructuring involving the Parent, Nike Inc., and certain of its subsidiaries. EAIaHD Furthermore, NIKE, Inc., NIKE Philippines, and NIKE Laser all belong to the NIKE Group, with NIKE, Inc. as the indirect but ultimate parent of the last two companies, which negates the finding that there was effectively a transfer of beneficial ownership of the NIKE Philippines Shares. Under these premises, there can be no donative intent on the part of NIKE, Inc. Based on these facts, it is evident that NIKE, Inc. cannot be held liable for donor's tax on the transfer of the NIKE Philippines Shares to the transferee NIKE Laser in the absence of any donative intent and if the transfer is motivated instead by business considerations. This ruling is being issued on the basis of the foregoing facts as presented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered as null and void. cCHETI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service