Whether Certain Exchange Transactions in Case of Merger Are Subject to Documentary Stamp Tax

February 2, 2001 BIR RULING NO. 002-01 40 (C) S-40-220-2000 Padilla Law Office 7/F. Padilla-De los Reyes Bldg. 232 Juan Luna St., Binondo Manila 1006 Attention: Attys . Sabino Padilla, Jr . and Sabino B . Padilla IV Gentlemen : This refers to your letter dated January 20, 2000 requesting, on behalf of your clients, Bank of the Philippine Islands (BPI), Michigan Holdings, Inc. (MHI), Ayala Insurance Holdings, Inc. (AIHC) and Far East Bank and Trust Company (FEBTC), for a ruling as to whether or not the following exchange transactions in the case of merger of the said companies are subject to the documentary stamp tax, specifically: 1. on the transfer of real properties of FEBTC to BPI at their book value and the transfer of real properties of AIHC as "boot" to MHI; and 2. on the "surrender" of shares of AIHC and FEBTC to BPI as provided for in the Plan of Merger and the subsequent "replacement" of the same of BPI shares at an agreed ratio provided in the Plan of Merger. It is your position that no documentary stamp taxes should be imposed on both transactions. In reply, please be informed that in the case of merger of two or more corporations, no gain or loss is recognized where a corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, also a party to the merger or consolidation pursuant to Section 40(C) of the Tax Code of 1997, which is quoted hereunder as follows: "(C) EXCHANGE OF PROPERTY "(1) General Rule . Except as herein provided, upon the sale or EXCHANGE or property , the entire amount of the gain or loss, as the case may be, shall be recognized . "(2) Exception . No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation "(a) A CORPORATION , which is a party to a merger or consolidation, EXCHANGES PROPERTY SOLELY FOR STOCK in a corporation, which is a party to the merger or consolidation; or "(b) A SHAREHOLDER EXCHANGES STOCK in a corporation, which is a party to the merger or consolidation, SOLELY FOR THE STOCK OF ANOTHER CORPORATION also a party to the merger or consolidation ; or "(c) A SECURITY HOLDER of a corporation, which is a party to the merger or consolidation, EXCHANGES SECURITIES in such corporation, SOLELY FOR STOCK or securities in another corporation, a party to the merger or consolidation . "No gain or loss shall also be recognized if property is TRANSFERRED to a corporation by a PERSON IN EXCHANGE FOR STOCK or unit of participation in such a corporation of which as a result of such EXCHANGE said persons, alone or together with others, not exceeding four (4) persons, gains CONTROL of said corporation ; Provided, That stocks issued for services shall not be considered as issued in return for property." (Emphasis supplied.) xxx xxx xxx In relation to this, the term "merger" or "consolidation" is defined under Section 40(C)(6)(b) as follows: "(b) The term " merger " or " consolidation, " when used in this Section, shall be understood to mean the ordinary merger or consolidation, or the acquisition by one corporation of all or substantially all the properties of another corporation SOLELY FOR STOCK : Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit: . . . "(Emphasis supplied) But there is no debate as to the tax deferment of the gain or loss on the said transfer of real properties and shares of stocks of the merging corporation, where BPI shall be the surviving corporation as provided for in the Plan of Merger, and where such transfer shall be solely for the shares of stock of BPI. Our main concern here is whether or not the said exchange of properties is subject to documentary stamp taxes. TIEHDC (1) Exchange of Real Property of a Corporation, which is a Party to a Merger or Consolidation, Solely for Shares of Stock in a Corporation, which is a Party to the Merger or Consolidation . Sections 173 and 177 of Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations" provide as follows: "Sec. 173. Deeds on exchange of properties . In the case of an exchange of two properties, the deeds transferring title to each are subject to tax , which should in each case be computed on the basis of the actual value of the interest or property conveyed, the amount of any preexisting lien or encumbrance which is not removed by the sale being deductible. xxx xxx xxx "Sec. 177. Stock in a corporation a valuable consideration . Stock in a corporation is a valuable consideration for the transfer of real property." It is the opinion of this office that these are the legal bases why the exchange of real properties of a corporation, which is a party to a merger or consolidation, solely for stock in a corporation, which is also a party to the merger or consolidation (Sec. 40(C)(2)(a), is being subjected to the documentary stamp under Section 196 of the Tax Code of 1997, but which is now based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Sec. 6(E) of the Tax Code, whichever is higher. (2) Exchange of Shares of Stock of a Corporation, which is a Party to a Merger or Consolidation, Solely for Shares of Stock in a Corporation, which is a Party to the Merger or Consolidation . It is a cardinal rule that a corporation has a juridical personality separate and distinct from the persons (natural or juridical) that compose it. However, being a statutory creation, the corporation must exist and operate only for legitimate ends. Hence, when the notion of corporate entity is employed to defeat public convenience, or to commit fraud or wrongful acts, the law recognizes the need for protecting the interest of justice by "piercing the veil of corporate fiction and looking beyond the corporate form to the actual enterprise." But this is not the case where we will have to pierce that veil of corporate fiction because in this instant case, it is very clear that because of the merger, the shares of stock of the absorbed corporations are necessarily absorbed by and transferred to the surviving corporation, solely in exchange for the latter's shares of stock. Section 176 of the Tax Code of 1997 on the imposition of documentary stamp tax on the delivery or transfer of shares of stock has this to say: "Sec. 176. Stamp Tax on Sales . . . Deliveries or TRANSFER of . . . Shares or Certificates of Stock . On all sales, . . or deliveries, or transfer of . . shares or certificates of stock in any . . . corporation, . . whether entitling the holder in any manner to the benefit of such certificates/shares of stock, . . there shall be collected a documentary stamp tax of P1.50 on each P200, or fractional part thereof, of the par value of such . . . certificate of stock . . . "(Emphasis supplied.) Thus, when the assets (in the form of shares of stock) of an absorbed corporation, which is a party to a merger or consolidated, is exchanged or transferred to the surviving corporation, also a party to the merger or consolidation, solely for shares of stock of that surviving corporation, the said transfer shall be subject to the documentary stamp tax under Section 176 of the Tax Code of 1997. Please take note that the mere act of transferring the shares of stock, whether it would entitle the holder in any manner to the benefit of such shares of stock, is already taxable under the said provision of the Tax Code. In view of all the foregoing, it is the opinion of this Office, as we hereby hold, that the tax-deferred exchange of properties of a corporation, which is a party to a merger or consolidation, solely for shares of stock in a corporation, which is also a party to the merger or consolidation, is subject to the documentary stamp tax under Section 176 if the properties to be transferred are shares of stock or even certificates of obligations, and also to the documentary stamp tax under Sec. 196 , if the properties to be transferred are real properties. Finally, it may be worth mentioning that the original issuance of shares of stock of the surviving corporation in favor of the stockholders of the absorbed corporation as a result of the merger, is subject to the documentary stamp tax under Sec. 175 of the Tax Code of 1997. (BIR Ruling No. S-40-220-2000, December 21, 2000) TSacID 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, (SGD.) LILIAN B. HEFTI Deputy Commissioner Officer-in-Charge