Santiago & Santiago Law Offices

November 16, 2009 BIR RULING [DA-(C-269) 674-09] 175; BIR Ruling 096-96; DA 216-04; DA 326-05; DA 003-06; DA-678-07 Santiago & Santiago Law Offices Ground Floor, Ortigas Building Ortigas Avenue cor MERALCO Avenue 1605 Pasig City Attention: Atty. Manuel C. Carlos Gentlemen : This refers to your letter dated October 28, 2009 requesting, on behalf of your client, NEGROS NAVIGATION CO., INC. ("NENACO"), confirmation of your opinion that the issuance of new shares of stocks to replace previously issued and outstanding shares of stocks, pursuant to a decrease in capital stock, is exempt from the payment of documentary stamp tax (DST). It is represented that NENACO is a domestic corporation organized and existing under and by virtue of the laws of the Philippines, with business address at Pier 2, North Harbor, Port Area, Tondo, Manila, and registered with the Securities and Exchange Commission (SEC) as evidenced by SEC Registration No. 1275 dated July 26, 1932. NENACO is under corporate rehabilitation, which is the subject of Special Proceedings No. 04-109532, before Branch 46 of the Regional Trial Court of Manila. The authorized capital stock of NENACO is Four Billion Pesos (P4,000,000,000.00) divided into four billion (4,000,000,000) common shares with a par value of One Peso (P1.00) per share. The subscribed, issued and outstanding capital stock of NENACO is Three Billion Twenty Five Million Seven Hundred Thirty Three Thousand One Hundred Twenty Three Pesos (P3,025,733,123.00) divided into Three Billion Twenty Five Million Seven Hundred Thirty Three Thousand One hundred Twenty Three (3,025,733,123) common shares with a par value of One Peso (P1.00) per share. TEcADS As necessary and desirable action for its rehabilitation, NENACO intends to undertake an equity restructuring program consisting, among others, of the decrease in the capital stock of NENACO to Eight Hundred Million Pesos (P800,000,000.00) divided into four billion (4,000,000,000) common shares with a par value of Twenty Centavos (P0.20) per share, or a reduction of the par value of its shares from One Peso (P1.00) per share to Twenty Centavos (P0.20) per share, with the corresponding reduction in amount being offset with the capital deficit of NENACO. In a special meeting of the Board of Directors of NENACO dated March 29, 2004, the Board of Directors passed a resolution authorizing the corporation to "take all actions or matters necessary and desirable to rehabilitate the Corporate, including, but not limited to . . . the amendment of its Articles of Incorporation . . . the increase or decrease of its authorized capital stock . . . ." In a special meeting of the stockholders of NENACO on even date, the stockholders approved and adopted the said resolution of the Board of Directors. As a necessary consequence of the decrease in the capital stock of NENACO, the stockholders of record of NENACO shall be required to surrender their old stock certificates which NENACO shall cancel and for which it shall, without any monetary consideration, issue new stock certificates in order to reflect the new par value of the said shares. In reply, please be informed that in BIR Ruling No. DA-326-05, dated July 22, 2005, this Office had the occasion to rule that the issuance of new shares of stock to replace previously issued and outstanding shares of stock pursuant to a decrease in capital stock is exempt from the payment of DST under Section 175 of the Tax Code of 1997, as amended. The justification of the said exemption is that the surrender of the certificates of stock by the stockholders is a necessary consequence of the decrease in the capital stock of the corporation, and that in order to reflect the corrected number of shares therein, the stockholders of record should transfer and surrender their old certificate of stock to the corporation, without any monetary consideration, but only for the purpose of replacing the old stock certificates into new ones. In other words, there is no effective transfer of beneficial ownership over the said shares. In view thereof, and since the new shares of NENACO will be issued to replace its old shares with par value of One Peso (P1.00), the issuance of four billion (4,000,000,000) new common shares to its stockholders of record with par value of Twenty Centavos (P0.20) per share pursuant to the reduction of NENACO's capital stock, therefore, will not be subject to the DST imposed under Section 175 of the Tax Code of 1997, as amended. Moreover, neither said replacement of shares of stock subject to the DST imposed under Section 174 of the same Tax Code since the issuance of the new shares is merely in replacement of the previously issued and outstanding ones therefore not to be considered as original issuance of shares of stock as contemplated therein. DTAcIa 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service