Ayala Land, Inc.

July 1, 2008 BIR RULING [DA-(SEC40-001) 002-08] Sec. 34 (c) (2) (c), 1977 Tax Code 266-89; 035-90 Ayala Land, Inc. Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Atty. Mildo F. C. Sison Division Manager Gentlemen : This refers to your letter dated June 6, 2008 requesting a ruling on the tax consequence of the transfer of real property by Ayala Corporation in exchange for the shares of stock of Ayala Land, Inc. aTIEcA The facts as represented are as follows: Ayala Corporation is the registered owner of several parcels of land located in Makati City containing an aggregate area of approximately 59,642 square meters, more or less, and particularly described in Transfer Certificate of Title (TCT) Nos. S-109431, S-136487 and S-5756 of the Registry of Deeds of Makati City (the "Properties"). SEHACI In 1988, Ayala Corporation separated its holding company functions from its real estate operations. For the said purpose, Ayala Corporation incorporated Ayala Land, Inc. as a 100% owned subsidiary. Ayala Corporation conveyed and transferred to Ayala Land, Inc., its real estate operations and related assets in exchange for the latter's shares of stock, (the documents covering the conveyance and transfer of the assets by Ayala Corporation to Ayala Land, Inc. are referred to as the "Original Transfer Documents"). The foregoing facts were disclosed to all pertinent Government agencies, including the Bureau of Internal Revenue (BIR), for which a request for BIR Ruling was filed on September 7, 1988 and for which BIR Ruling No. 536-88 was secured on November 14, 1988. After the filing of the request on September 7, 1988 but prior to the release of BIR Ruling No. 536-88 on November 14, 1988, it was discovered that the Properties were inadvertently omitted from the Original Transfer Documents. Hence, on October 1, 1988, Ayala Corporation conveyed the Properties to Ayala Land, Inc. by executing a Deed of Exchange, whereby its aforesaid Properties were exchanged for the 16,213 Class "A" shares of Ayala Land, Inc., in addition to the shares it received in the Original Transfer Documents. The said exchange was in furtherance of the original intent to transfer to Ayala Land, Inc. all the Ayala Corporation's real estate operations and related assets. In order to physically effect and cause the issuance of title to one (1) parcel of land in the name of Ayala Land, Inc., particularly, TCT No. S-5756, which was inadvertently not processed in 1988, you are requesting for the non-recognition of gain or loss on the part of Ayala Corporation and of Ayala Land, Inc. in accordance with Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended, on the foregoing transfer of real property. Likewise, you are requesting for an exemption from the imposition of the value-added tax, donor's tax and documentary stamp tax on the said transaction. In reply thereto, please be informed that pursuant to then Section 34, paragraph (c) (2) (c) of the Tax Code of 1977, as amended, now last paragraph of Section 40 (C) (2) of the Tax Code of 1997, as amended, no gain or loss shall be recognized if property is transferred to a corporation by a person, in exchange for stock in such a corporation of which as a result of such exchange, said person, alone or together with others, not exceeding four persons, gains control of said corporation. The term "control" shall mean ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stock received, i.e. , subscribed, whether for property or for services by the transferor or transferors. In determining the 51% stock ownership, only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five. Accordingly, no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by Ayala Corporation of its real properties in exchange for the shares of stock of Ayala Land, Inc. through the execution of a Deed of Exchange on October 1, 1988, considering that after the exchange and as a result of the exchange it gained control of the transferee corporation. cTCADI It should be emphasized, however, that then Section 34 (c) (2) (c) of the Tax Code merely defers recognition of gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the properties or stocks involved in the exchange, the original or historical cost of the properties or the stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by him in the exchange, it will be subject to income tax on the gains derived from such sales or exchange, taking into consideration that the cost basis of the shares of stock shall be the same as the original acquisition cost or adjusted cost basis to the transferor of the properties exchanged therefor; and that the cost basis to the transferee of the properties exchanged for stocks shall be the same as it would be in the hands of the transferor. [Section 34 (c) (5) (a) and (b), 1977 Tax Code, as amended]. In that connection, the cost basis of the shares of stock received by Ayala Corporation in the above exchange transaction are as follows: No. of Shares of Stock Issued Cost Basis/Adjusted Cost Basis 16,213 Class "A" shares P1,621,300.00 Cost Basis/Adjusted Cost Basis/Historical Acquisition Cost per share @ P100.00 While the basis of Ayala Land, Inc. of the properties it received upon the exchange shall be the original acquisition cost or adjusted cost basis of Ayala Corporation of the properties exchanged which are as follows: ACEIac Property Transferred Cost Basis/Adjusted Cost Basis TCT No. S-109431 P832,300.00 TCT No. S-5756 667,000.00 TCT No. S-136487 122,000.00 TOTAL P1,621,300.00 =========== Moreover, you are further advised that in order that the parties to the exchange, can avail of the non-recognition of gains provided for in Section 34 (c) (2) (c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned: (a) The transferor must file with his income tax return for the taxable year in which the exchange was consummated a complete statement of all facts pertinent to the exchange including: 1. A description of the property transferred, or of his interest in such property, together with a statement of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the transfer; 2. The kind of stock received and preferences, if any; 3. The number of shares of each class received; and 4. The fair market value per share of each class at the date of the exchange. aHATDI (b) On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated the following: 1. A complete description of the properties received from the transferor; 2. A statement of the original acquisition cost or other basis of the property in the hands of the transferor and the adjusted cost basis thereof at the time of the transfer; and 3. Information with respect to the capital stock of the corporation including: a. The total issued and outstanding capital stock immediately prior to and immediately after the exchange, with a complete description of each class of stock; b. The classes of stocks and number of shares issued to the transferor in the exchange; and c. The fair market value as of the date of exchange of the capital stock issued to the transferor. In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayers participating in the exchange, showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of stocks/properties received in the exchange. aIAHcE Further, the parties herein shall cause the Register of Deeds to annotate on the Transfer Certificates of Title and/or the Corporate Secretary to annotate at the back of the Certificates of Stock, the date the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of stock involved, and the fact that no gain or loss was recognized as a result of such exchange; provided however, that any violation by the Register of Deeds of this condition shall be penalized under Section 269 of the Tax Code of 1997, as amended. Furthermore, it is required that within ninety (90) days from receipt of this ruling, the parties to the transaction must submit to the Law Division, Bureau of Internal Revenue, a certified true copy by the Register of Deeds or Corporate Secretary, as the case may be, of duly annotated Transfer Certificates of Title/Certificates of Stock, in respect of the transferred properties and shares of stock of transferee corporation. On the other hand, the transfer of the above-mentioned real properties by Ayala Corporation in 1988 to Ayala Land, Inc. is not subject to value-added tax (VAT) considering that: (1) VAT on the sale, exchange or disposition of real properties only came into effect by virtue of Republic Act No. 7716 which was enacted in 1994, or approximately six (6) years after the exchange, and; (2) under existing regulations, because Ayala Corporation gained further control of Ayala Land, Inc., the exchange of the properties in exchange for shares of stock under such circumstance is not subject to VAT pursuant to Section 4.106-8 (b) (1) of Revenue Regulations (RR) No. 16-2005, as amended. 1 The said transfer, likewise, is not subject to donor's tax as the same was made for a consideration and for a legitimate business purpose. Thus, negating the primary element of a donation which is the presence of donative intent. However, pursuant to Section 196 of the Tax Code of 1977, as amended, a conveyance or deed whereby land is assigned or transferred to the purchaser is subject to documentary stamp tax based on the consideration or value received or contracted to be paid for such realty. A stock in a corporation is a valuable consideration for transfer of real property. (Section 177, Documentary Stamp Tax Regulations) Accordingly, if a parcel of land is exchanged with stocks in a corporation as in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the Deed of Exchange executed to effect said transfer. (BIR Ruling No. 109-82 dated April 6, 1982) Furthermore, the certificates of stocks issued by Ayala Land, Inc. are original issues which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code 1977, as amended. After payment of the corresponding documentary stamp tax, the aforesaid real property may be registered by the Register of Deeds concerned in the name of Ayala Land, Inc. Finally, under Section 248 (d) in relation to Section 173 of the Tax Code of 1977, as amended, in case of failure to affix the proper documentary stamp tax to a document or instrument, there shall, for every violation, be imposed, in addition to the amount of documentary stamp tax required to be paid, an amount equivalent to 25% of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Thus, if in the above exchange transaction, the documentary stamp taxes due were not paid by the parties, the penalty provided for under Sec. 248 (d) of the 1977 Tax Code, as amended, shall hereby be imposed. (BIR Ruling No. 035-90 dated March 26, 1990 citing BIR Ruling No. 266-89) 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, this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Amending RR 7-95.