All Asian Countertrade

November 25, 2009 BIR RULING [DA-(C-277) 694-09] BIR Ruling No. DA-525-2007 & DA-654-2007 & DA-030-06 All Asian Countertrade 5th Floor, National Life Insurance Building 6762 Ayala Avenue Makati City Attention: Mr. Michael L. Escaler President Gentlemen : This refers to your letter dated October 7, 2009, indorsed to this Office from the Commissioner's Office, requesting for confirmation of your opinion that corporate property in the form of shares of stocks in another corporation is not subject to capital gains tax (CGT) when declared and conveyed as property dividends to stockholders. As represented, All Asian Countertrade, Inc. (AACI) is a domestic corporation registered and doing business in the Philippines. As of end of Fiscal Year 2006-2007, on September 30, 2007, AACI owned 2,983,916 shares of stocks of Pampanga Sugar Development Co. (Pasudeco) valued at PhP20.24 per share, as per Audited Financial Statement and Independent Auditor's Report by SGV & Co. On January 30, 2008, AACI declared to distribute to its stockholders, property dividends worth PhP10,000,000.00 in the form of 494,071 shares of stocks of Pasudeco owned by AACI, which declaration was noted and recorded by the Securities and Exchange Commission on September 11, 2008. In reply, please be informed that pursuant to Section 250 of the Income Tax Regulations dividends comprise any distribution, whether in cash or other property, in the ordinary course of business, even though extraordinary in amount, made by a domestic or resident foreign corporation to the stockholders out of its earnings or profits. In BIR Ruling No. 554-88 dated November 22, 1988, this Office had occasion to rule that a dividend paid in stock of another corporation is not a stock dividend, even though the stock distributed was acquired through the transfer, by the corporation declaring the dividends, of property to the corporation the stock of which is distributed as a dividend. ACcDEa A corporation realized no taxable income in declaring a dividend since the distribution of dividends among the stockholders is not a sale nor were assets used to discharge an indebtedness ( General Utilities and Operating Co. vs. Helvering, 296 U.S. 200-207 and BIR Ruling No. DA-077-98 dated March 12, 1998). Such being the case, AACI is not subject to income tax or capital gains tax when it declares and transfers its Pasudeco shares as property dividends in favor of its stockholders. (BIR Ruling No. 154-93 dated April 28, 1993). Pursuant to Section 27 (D) (4) of the Tax Code of 1997, dividends received by a domestic corporation from another domestic corporation shall not be subject to tax. Such being the case, the receipt of the shares of stock of Pasudeco by the corporate stockholders of AACI, arising from the latter's declaration of property dividends, shall not be subject to any income or capital gains tax and consequently, to the withholding tax (BIR Ruling No. DA-654-2007 dated December 14, 2007). However, in the case of individual stockholders, a final tax at the rate of ten percent (10%) shall be imposed upon the property dividends they will receive from AACI in accordance with Section 24 (B) (2) of the Tax Code of 1997 (BIR Ruling No. DA-525-07 dated October 4, 2007). 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