Sebastian Liganor Galinato & Alamis Attorneys at Law

September 23, 2008 BIR RULING [DA-(S40M-007) 250-08] 40 (C) (2) & (6) (b); S-40-004-2003 Sebastian Liganor Galinato & Alamis Attorneys at Law 1409 East Tower, Philippine Stock Exchange Centre Exchange Road, Ortigas Center, Pasig City Attention: Attys. Avelino M. Sebastian, Jr. and Sheryl L. Olao Gentlemen : This refers to your letter dated September 15, 2008 requesting on behalf of your client, Bridgebury Realty Corp. (hereafter, "Bridgebury"), for confirmation of your opinion that the proposed merger of Bridgebury and Oxbury Realty Corp. (hereafter, "Oxbury"), with the former as the surviving entity, qualifies as a tax free merger under Section 40 (C) (2) of the National Internal Revenue Code (NIRC) of 1997, as amended. AECIaD Background Bridgebury is a corporation duly organized and validly existing under Philippine laws, with principal office at 4th Floor, Makati Stock Exchange Building, Ayala Avenue, Makati City. Bridgebury has an authorized capital stock of Ninety Million Pesos (Php90,000,000.00) divided into nine million (9,000,000) shares, each with a par value of Ten Pesos (Php10.00). The total issued and outstanding capital stock of Bridgebury is Eighty-Eight Million Four Hundred Sixteen Thousand Pesos (Php88,416,000.00). Oxbury, on the other hand, is a corporation duly organized and validly existing under Philippine laws, with principal office at 4th Floor, Makati Stock Exchange Building, Ayala Avenue, Makati City. Oxbury has an authorized capital stock of One Hundred and Fifteen Million Pesos (Php115,000,000.00) divided into Eleven Million and Five Hundred * (11,500,000) shares, each with a par value of Ten Pesos (Php10.00). Its total issued and outstanding capital stock is One Hundred Ten Million Four Hundred and Twenty-Four Thousand Pesos (Php110,424,000.00). Bridgebury is previously owned by Ayala Land, Inc. (hereafter "Ayala"). Bridgebury owns a parcel of land (hereafter "Bridgebury Land") with a substituted value, as reflected on its Transfer Certificate of Title No. 221141, of Ninety-Five Million Sixty-Eight Thousand Nine Hundred and Fourteen Pesos (Php95,069,914). Thereafter, Mercator Securities Corp. (hereafter "Mercator"), a corporation validly existing under and by virtue of Philippine laws, bought all the shares of Bridgebury which at that time had a book value of Four Hundred Forty-Two Million and One Hundred Thousand Pesos (Php442,100,000.00). Oxbury is also previously owned by Ayala and thereafter acquired by Mercator by swapping its shares in Crans Montana Property Holdings, Corp., a corporation wholly owned by Mercator. Oxbury shares at that time had a book value of Five Hundred Fifty-Two Million and One Hundred Thousand Pesos (Php552,100,000). Oxbury owns a parcel of land (hereafter "Oxbury Land") with a substituted value of One Hundred Eighteen Million Seven Hundred Thirty-Two Thousand Nine Hundred and Nineteen Pesos (Php118,732,919) reflected on its Transfer Certificate of Title No. 221140. Thus, Bridgebury and Oxbury are both subsidiaries of one and the same parent corporation, Mercator. Bridgebury and Oxbury (collectively, the "Constituent Corporations") desire to merge pursuant to Sections 76 to 80 of the Corporation Code of the Philippines, and Section 40 (c) (2) of the National Internal Revenue Code of 1997 ("Tax Code"), with Bridgebury as the surviving entity. Bridgebury Land has an area of 3,684 sq. m. located in Makati City which is adjacent to Oxbury Land with an area of 4,601 sq. m. The restrictions governing the size of office buildings in that zone only allow a maximum of FAR 8 (floor area ratio). With the merger of the Constituent Corporations, Bridgebury as the surviving entity can build an office building up to the extent of the combined lot areas of both parcels of land multiplied by eight (the FAR 8 rule) or up to 66,280 sq. m. DCTHaS The Articles of Merger and Plan of Merger have been approved and ratified by the respective Boards of Directors and stockholders of the Constituent Corporations on August 19, 2008. The net assets of Oxbury, as shown in its Audited Financial Statements as at December 31, 2007, shall be conveyed, assigned, and transferred to Bridgebury pursuant to the Articles of Merger and Plan of Merger. Bridgebury, in turn, will issue One Hundred Twenty-Seven Million and Five Hundred Thousand Pesos (Php127,500,000.00) worth of shares to the stockholders of Oxbury also pursuant to the Articles of Merger and Plan or Merger. Whatever assets may not have been reflected in the said balance sheet of Bridgebury as at December 31, 2007, or which may have been omitted therefrom for any reason whatsoever, as well as all other assets which may come into its possession or to which it may be entitled after the aforesaid date and until the approval of the merger by the Securities and Exchange Commission (SEC), shall be deemed included in the conveyance, assignment and transfer to Bridgebury. Furthermore, all transactions entered into by Oxbury during the said period shall be for the account of Bridgebury. The Effective Date of Merger indicated in the Plan of Merger is October 1, 2008, but this is subject to the approval by the SEC of the Articles of Merger and issuance of the Certificate of Filing of the Articles of Merger. Upon the Effective Merger Date (or the date of approval by the SEC) the corporate existence of Oxbury shall cease and thereupon, all rights, privileges, powers and franchises of Oxbury and all property, real, personal or mixed as of the Effective Merger Date, shall be vested in Bridgebury without further act or deed, and all such property, rights, privileges, powers and franchises, and all and every interest of Oxbury shall thereafter be as effectually the property of Bridgebury as they were of Oxbury. Based on the foregoing, you now request for confirmation that: 1. No gain or loss shall be recognized by Bridgebury and Oxbury upon the assumption by Bridgebury of the net assets of Oxbury, and no gain or loss shall be recognized by Bridgebury and Oxbury and their respective stockholders upon the issuance and distribution of Bridgebury shares to the stockholders of Oxbury pursuant to the Plan of Merger, in accordance with Section 40 (C) (2) of the Tax Code of 1997; 2. The cost basis of the shares of Bridgebury which Oxbury shall acquire pursuant to the Articles of Merger and Plan of Merger shall be the same as the cost basis of the shares to Bridgebury; while the cost basis to Bridgebury of the net assets of Oxbury that Bridgebury shall acquire shall be the same as it would be in the hands of Oxbury pursuant to Section 40 (C) (5) of the Tax Code. 3. The transfer and assignment of the net assets of Oxbury in exchange for the shares of Bridgebury pursuant to the Plan of Merger is not subject to value-added tax (VAT) pursuant to Revenue Regulations No. 16-05, as amended. 4. Unutilized input tax paid and Net Operating Loss Carry Over (NOLCO) of Oxbury may be transferred to Bridgebury as part of the net assets of Oxbury. TaDCEc 5. No documentary stamp tax (DST) shall be imposed on the transfer and assignment by Oxbury of its net assets to and in exchange for the shares of Bridgebury pursuant to the Plan of Merger in accordance with Revenue Regulations No. 13-04. 6. The original issuance by Bridgebury of shares of stock in consideration for the transfer by Oxbury of its net assets pursuant to the Plan of Merger is subject to DST pursuant to Section 174 of the Tax Code, as amended by Republic Act No. 9243. 7. The transfer of net assets of Oxbury will not be considered as a transfer of property for insufficient consideration subject to donor's tax since there is no donative intent on the part of either of the parties and that the transaction is effected purely for legitimate business purposes. 8. The liabilities of Bridgebury will not remove the exchange of properties from the coverage of a tax-free exchange under Section 40 (C) (2) of the Tax Code. In reply thereto, please be informed as follows: 1. The above reorganization of Bridgebury and Oxbury, with the former as the surviving corporation, is a merger within the contemplation of Section 40 (C) (6) (b) of the Tax Code of 1997, as amended, for the reason being that Bridgebury will acquire/assume all the assets and liabilities of Oxbury solely in exchange for stocks. Hence, the merger is being undertaken for a bona fide business purpose, and not for the purpose of escaping the burden of taxation. (a) The merger of Bridgebury and Oxbury qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 40 (C) (2) of the 1997 Tax Code, as amended, that no gain or loss shall be recognized by Oxbury, as the transferor of all assets and liabilities, to Bridgebury pursuant to the Plan of Merger; (b) No gain or loss shall be recognized by Bridgebury, as the transferee, on its receipt of the assets and liabilities of Oxbury pursuant to and as a consequence of the merger; and (c) No gain or loss shall be recognized by the respective stockholders of Oxbury upon the issuance and distribution of Bridgebury shares to them pursuant to the Plan of Merger EDSHcT 2. The basis of the assets to be received by Bridgebury shall be the same as it would be in the hands of Oxbury; and that the cost basis to the transferee of the properties transferred, pursuant to the merger, shall be the same as it would be in the hands of Oxbury. (Sec. 40 (C) (5) (a) and (b) of the Tax Code of 1997) Accordingly, the substituted bases of the assets transferred by Oxbury as of December 31, 2007 are as follows: Property Substituted Basis Cash P1,921,277.00 Receivables 457,672.00 Prepaid tax and input tax 201,501.00 Investment in land (TCT No. T-221140) 552,120,000.00 TOTAL P554,700,450.00 ============= The allocation of the shares to be issued by the transferee and the substituted bases of said shares are as follows: Name of Property No. of Shares to Substituted Basis Corp. be Issued Oxbury Cash 44,161 P1,921,277.00 Receivables 10,520 455,961.00 Prepaid tax and input 4,632 200,748.00 tax Investment in Land 12,690,687 550,056,071.00 (TCT No. T-221140) TOTAL 12,750,000 P552,634,057.00 ========= ============= 3. Section 105 of the Tax Code of 1997, as amended by R.A. 9337, identifies the persons liable for the Value-Added-Tax. Thus, "SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. EcHTDI xxx xxx xxx." However, Section 4.106-8 (b) (3) of Revenue Regulations (RR) No. 16-2005, as amended by RR No. 4-2007 specifically excludes mergers from being subject to output tax. Hence, "SEC. 4.106-8. Change or Cessation of Status as VAT-registered Person. xxx xxx xxx (b) Not subject to output tax. The VAT shall not apply to goods or properties existing as of the occurrence of the following: (1) . . . (2) . . . (3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed by the surviving or new corporation." TcAECH Thus, the above-mentioned transaction shall not be subject to value-added tax, and any unused input VAT of Oxbury as of the effective date of merger will be transferred to and absorbed by Bridgebury pursuant to Section 4.106-8 (b) (3) of RR No. 16-2005, otherwise known as the "Consolidated Value-Added Tax Regulations of 2005", as amended by RR No. 4-2007, the said transfer being considered a transaction "not subject to output tax" under the said Section. 4. Section 34 (D) (3) of the Tax Code of 1997, as amended, and being implemented by Revenue Regulations (RR) No. 14-2001, provides to wit: "(3) Net Operating Loss Carry-Over . The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that Not less than seventy-five percent (75%) in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or Not less than seventy-five percent (75%) of the paid-up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. For purposes of this Subsection, the term 'net operating loss' shall mean the excess of allowable deduction over gross income of the business in a taxable year: xxx xxx xxx." In a merger, the surviving corporation (Bridgebury) succeeds to the rights and liabilities of the absorbed corporation (Oxbury) and merely carries on the identity of the latter. Consequently, no gain was realized by the surviving corporation. (BIR Ruling No. 112-96 dated October 25, 1996) Accordingly, Bridgebury can claim as NOLCO deduction the NOLCO balance of Oxbury, which shall be transferred and vested in the surviving corporation by operation of law pursuant to a statutory merger. (S-40-207-2001 dated October 24, 2001 citing BIR Ruling No. 137-99 dated August 31, 1999) 5. The transfer of assets by Oxbury to Bridgebury shall not be subject to DST pursuant to Section 199 (m) of the Tax Code, as amended by R.A. No. 9243, which provides: "SEC. 199. Documents and Papers Not Subject to Stamp Tax. The provisions of Section 173 to the contrary notwithstanding, the following instruments, documents and papers shall be exempt from the documentary stamp tax: xxx xxx xxx (m) Transfer of property pursuant to Section 40(c)(2) of the National Internal Revenue Code of 1997, as amended." 6. Section 174 of the Tax Code, as amended by Section 1 of Republic Act No. 9243, imposes a DST of One Peso (P1.00) on each Two Hundred Pesos (P200.00), or fractional part thereof, of the par value of shares of stock originally issued. Pursuant thereto, the shares of stock that Bridgebury will issue to the stockholders of Oxbury in exchange for the net assets of Oxbury, being original issues, will be subject to DST at the rate of One Peso (P1.00) on each Two Hundred Pesos (P200.00) of their par value, amounting to P637,500.00. 7. Well-settled in our jurisprudence is the fact that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor, (2) the increase in the patrimony of the donee; and (3) the intent to do an act of liberality (animus donandi). Clearly, there is no intention on the part of any of the parties to the merger Oxbury to donate to Bridgebury its assets since the transaction is purely for legitimate business purpose. Thus, the aforesaid merger will not be subject to gift tax since there is no intention to donate, and the transaction is a bona fide merger effected solely for business reasons. 8. Section 40 (C) (4) of the Tax Code of 1997, as amended, provides that if the transferee in the herein exchange transaction assumes a liability of the transferor, or acquires from the transferor property, subject to a liability, then such assumption or acquisition shall not be treated as money and/or other property, and shall not prevent the exchange from being within the exceptions contemplated under Sec. 40 (C) (2) of the same Code. Thus, the liabilities assumed by Bridgebury from Oxbury will not remove the exchange of properties from the coverage of a tax-free exchange. It is understood, however, that upon the subsequent sale or exchange of the assets acquired by Bridgebury, the gain derived from such sale or exchange shall be subject to income tax. Moreover, in order that the above-described reorganization can be considered as merger under Section 40 (C) (2) of the Tax Code of 1997, the parties to the merger should comply with the following requirements: A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation, which is a party to the reorganization, shall file, as part of its return for the taxable year within which the reorganization occurred, a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including: (1) A copy of the plan of reorganization, together with a statement, executed under the penalties of perjury, showing in full the purposes thereof and in detail all transactions incident to, or pursuant to the plan; (2) A complete statement of the cost or other basis of all properties, including all stocks or securities, transferred incident to the plan; (3) A statement of the amount of stock or securities and other property or money received from the exchange including a statement of all distribution or other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value thereof at the date of the exchange; and (4) A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject. cAISTC B. Every taxpayer, other than a corporation, who is a party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the non-recognition of gain or loss upon such exchange including: (1) A statement of the cost or other basis of the stock or securities transferred in the exchange; and (2) A statement in full of the amount of the stock or securities and other property or money received from the exchange, including any liability assumed upon the exchange, and any liability to which property received is subject. The amount of each kind of stock or securities and other property (other liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at the date of exchange. C. Permanent records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liability assumed on the exchange, or any liability to which any of the properties received were subject), in order to facilitate the determination of gain or loss from a subsequent disposition of such stock or securities and other property received from the exchange. (par. 9803-8, Prentice Hall 1963, ed., p. 9611) In addition to the foregoing requirements, the parties shall enclose with their respective income tax returns for the taxable year in which the merger occurred a copy of the request for ruling filed with, and the corresponding ruling issued by, the Bureau of Internal Revenue, both duly stamp-received by the appropriate office of the Bureau of Internal Revenue. Such parties shall include as a note to their respective audited financial statements for the taxable year in which the merger occurred a statement to the effect that they hold such assets/shares acquired in a merger and the year in which such merger occurred, and in the taxable years until the subject properties are subsequently transferred to another transferee. THEcAS Finally, the parties are required to submit proof of annotation of the substituted basis of the shares of stock and/or real properties involved in the transfer within ninety (90) days from receipt of this ruling. Violation of this requirement is subject to the penalties provided in Section 275 of the Tax Code of 1997. 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, and/or any of the requirements imposed in this letter is not complied with, 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