Martinez Vergara Gonzales Serrano

November 24, 2009 BIR RULING [DA-(C-281) 701-09] Sec. 127 (B); RR 2-01; 072-97; 035-99; 025-2002; DA-001-06; DA-0327-07; DA-(C-023) 105-08 Martinez Vergara Gonzales Serrano Suite 2401, The Orient Square F. Ortigas, Jr. Road, Ortigas Center Pasig City Attention: Atty. Manuel Z. Gonzales Gentlemen : This refers to your letter dated July 7, 2009 stating that your client, IP E-Games Inc., is a company engaged in the IT business and registered with the Board of Investments ("BOI") as a non-pioneer enterprise enjoying full BOI incentives. It is currently controlled by IP Global Holdings, Inc. ("IP Global"), a company registered in the British Virgin Islands which holds ninety percent (90%) of the issued and outstanding shares of stock of IP E-Games Inc., while the remaining ten percent (10%) has been set aside and is partially held by the employees of IPVG Corp. ("IPVG"), a company currently listed with the Philippine Stock Exchange ("PSE") under an employee stock purchase plan. AHECcT IPVG, at the moment, has approximately over seven hundred (700) stockholders, of which some are held by Philippine Central Depository, Inc. nominees, some of whom are stock brokerages also holding the shares for numerous individual and corporate stockholders. On the other hand, IP Global is owned by three (3) groups of stockholders; one of which is IPVG, which controls approximately seventy one percent (71%) of IP Global while the balance is held by two (2) other local companies which own twenty one percent (21%) and eight percent (8%) of the issued and outstanding capital, respectively. Sixty three and one-fourth percent (63.25%) of the outstanding shares of the IPVG is owned by its directors, officers, employees and other parties, while the remaining thirty six and three fourths percent (36.75%) of IPVG's outstanding capital has been distributed to the investing public. As a BOI registered entity, IP E-Games Inc. is required under Executive Order (E.O.) No. 226, otherwise known as the Omnibus Investments Code of 1987, as amended, to offer its shares to the public. To comply with this requirement, the Company is contemplating listing its shares by way of introduction with the PSE pursuant to its listing rules and regulations (hereinafter referred to as the "Listing Rules"). ADSTCI The Listing Rules 1 of the PSE provide that no closely held corporation may list its stocks by way of introduction, to wit: "Section 1. Listing by Way of Introduction. . . . Listing of securities by way of introduction may be appropriate in the following circumstances: xxx xxx xxx (e) where public offering of securities is mandated by law or applicable regulations; Provided, that the applicant company secures a clearance from the relevant agency stating that such agency does not object to the listing by way of introduction of the securities of the company; Provided further that a company which is considered as a "closely held corporation", as such term is defined under Section 127(B) of the National Internal Revenue Code of 1997, is not qualified to list by way of introduction under this item (e) ." [Emphasis supplied] In connection therewith, before IP E-Games Inc. may be able to list its shares by way of introduction, the PSE requires a ruling from the Bureau of Internal Revenue (BIR) stating that IP E-Games Inc. is not a closely held corporation. It is your opinion that IP E-Games Inc. is not a closely held corporation based on the "grandfather rule" under Section 96 of the Corporation Code, and based on several rulings issued by the BIR involving similar circumstances. As such, you are requesting for a ruling declaring IP E-Games Inc. to be a publicly held corporation. EDISTc Further, it is your opinion that since IP E-Games Inc. is not a closely held corporation, it will not be subject to the Initial Public Offering Tax ("IPO Tax") imposed under Section 127 (B) of the Tax Code of 1997, as amended, upon its listing with the PSE. From the foregoing, you are requesting confirmation of your above opinion that IP E-Games Inc. is not a closely held corporation and that as a consequence thereof, it is not subject to the IPO Tax imposed under Section 127 (B) of the Tax Code of 1997, as amended, upon its listing with the PSE. In reply thereto, please be informed as follows: 1. Whether or not IP E-Games Inc. is a closely-held corporation. Section 127 (B) of the Tax Code of 1997, as amended, provides in relevant part as follows: . . . , the term "closely held corporation" means any corporation at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is based on stock ownership, the following rules shall be applied: (1) Stock not Owned by Individuals 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 . ATcEDS (2) Family and Partnership Ownerships. . . . (3) Option . . . (4) Constructive Ownership as Actual Ownership Stock constructively owned by reason of the application of paragraph (1) or (3) hereof shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by the individual by reason of the application of paragraph (2) hereof shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. [Emphasis supplied] Thus, under Section 4 of Revenue Regulations No. 2-2001, 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. In BIR Ruling No. 025-2002 dated June 25, 2002, this Office held that since Abbott-Phils. is a wholly-owned subsidiary of Abbott-US, such shares will be considered as being owned proportionately by the Abbott-US shareholders. This is because the ownership of a domestic corporation for purposes of determining whether it is a closely held corporation or a publicly held corporation is ultimately traced to the individual shareholders of the parent company. Thus, where at least 50% of the outstanding capital stock 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 20 or more individuals, the corporation is considered a publicly-held corporation as the term is defined under Revenue Regulations No. 2-2001. EIAScH In determining the ownership of IP E-Games Inc. by considering the effective ownership through IPVG, this Office agrees with your opinion that it is not a closely held corporation. IP E-Games Inc. is indirectly owned by IPVG through IP Global. This indirect interest of IPVG translates to an effective ownership in IP E-Games Inc. amounting to sixty four percent (64%) of its outstanding capital stock. As a consequence of IPVG's indirect ownership in IP E-Games Inc., the public effectively holds a twenty three percent (23%) interest in it while its directors, officers, employees and other persons of IPVG would have an effective ownership of forty percent (40%) over IP E-Games Inc. On several occasions, this Office ruled that "in the case of multi-tiered corporation, the stock attribution rule must be allowed to run continuously along the chain of ownership until it finally reaches the individual stockholders. This is in consonance with the "grandfather rule" adopted in the Philippines under Section 96 of the Corporation Code [Batas Pambansa (BP) Blg. 68] which provides that notwithstanding the fact that all the issued stock of a corporation are held by not more than twenty persons, among others, a corporation is nonetheless not to be deemed a close corporation when at least two thirds of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation. (BIR Ruling Nos. DA-(C-023) 105-08 dated August 4, 2008, DA-0327-07 dated June 14, 2007, DA-001-06 dated January 4, 2006, 035-99 dated March 25, 1999, & 072-97 dated July 2, 1997). 2. Non-Applicability of the IPO Tax DTIcSH Section 127 (B) of the Tax Code of 1997, as amended, provides that: "SEC. 127. Tax on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public offering. xxx xxx xxx (B) Tax on shares of stock sold or exchanged through initial public offering. There shall be levied, assessed and collected on every sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporation , as defined herein, a tax at the rates provided hereunder based on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed in accordance with the proportion of shares of stock sold, bartered, exchanged or otherwise disposed to the total outstanding shares of stock after the listing in the local stock exchange: Up to twenty-five percent (25%) 4% Over twenty-five percent (25%) but not over thirty three and one third percent (33 1/3%) 2% Over thirty-three and one third percent (33 1/3%) 1% The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondary offering." (Italics provided) Based on the discussion set forth above, and since IP E-Games Inc. is found not to be a closely held corporation, this Office hereby confirms your opinion that the IPO Tax imposed under Section 127 (B) of the Tax Code of 1997, as amended, would not be applicable to IP E-Games Inc. upon its listing with the PSE. 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. CDAcIT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Revised Rules on Listing by Way of Introduction, Section 1 (e) .