Salvador & Associates

November 10, 2009 BIR RULING [DA-(C-258) 659-09] Section 29 (B) (2) (a); BIR Ruling No. DA-683-07 Salvador & Associates Attorneys-at-Law 815-816 Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Attys. Euney Marie J. Mata-Perez Mardomeo N. Raymundo, Jr. and Marie Francesca Luz O. Dela Cruz Gentlemen : This refers to your letter dated August 24, 2009 requesting on behalf of your client, Marina Square Properties, Inc. ("MSPI") for confirmation of your opinion that MSPI is a publicly-held corporation and is therefore exempt from the Improperly Accumulated Earnings Tax ("IAET") under Section 29 of the Tax Code of 1997, as amended. CIAcSa It appears that Marina Square Properties, Inc. ("MSPI") is a domestic corporation organized and existing under the laws of the Republic of the Philippines, registered with the Securities and Exchange Commission (SEC) under SEC Registration No. CS200257710. MSPI is a wholly-owned subsidiary of CTF Properties (Philippines), Inc. ("CTFPPI"), a domestic corporation organized under the laws of the Republic of the Philippines. CTFPPI, in turn, is wholly-owned by Flexi-Deliver Holding Ltd. ("Flexi-Deliver"), a corporation created under the laws of the British Virgin Islands ("BVI"). One hundred percent (100%) of the capital stock of Flexi-Deliver is owned by Maxiprofit International Limited ("Maxiprofit"), a corporation incorporated under the laws of the BVI. On the other hand, fifty-one percent (51%) of the capital stock of Maxiprofit is owned by Fortune Gate Overseas Limited ("Fortune Gate"), a BVI-company. Fortune Gate is wholly-owned by International Entertainment Corporation ("IEC"), a publicly listed company incorporated in the Cayman Islands whose shares have been listed on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited since July 31, 2000. As of August 18, 2009, IEC has more than 159 stockholders. 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. SEHTAC (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. 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, MSPI is a publicly-held corporation since 51% of its outstanding capital stock is ultimately and proportionately owned by the stockholder of IEC, a publicly listed company in Hong Kong. As mentioned above, the shares of stock of IEC are held by more than 159 stockholders. aDECHI In view of the foregoing, this Office holds that 50% of the issued and outstanding capital stock of MSPI, comprising the 51% shares indirectly owned by stockholders of IEC, is owned by more than 20 individuals. Hence, MSPI 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, as amended. 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