Amount Deposited to Subsidiary Company to be Applied to Future Subscription Not Subject to Documentary Stamp Tax

November 17, 2003 BIR RULING NO. 015-03 175 000-00 EBC Strategic Holdings Corporation Equitable PCI Bank Towers H. V. dela Costa St., cor. Makati Avenue Makati City Attention: Mr. Sergio Ll. Naranjilla, Jr. President Gentlemen : This refers to your letter dated April 4, 2002 stating that EBC Strategic Holdings Corporation (ESHC), a wholly owned subsidiary of Equitable PCI Bank (EPCIB) (formerly Equitable Banking Corporation), is a domestic corporation registered with the Securities and Exchange Commission to engage, among others, in buying and selling securities for their own account; that in 1998, EPCIB prepared a business plan to increase its investment in the subsidiary company ESHC; that in preparation for the completion of the regulatory requirements, such as the approval of the investment by the Bangko Sentral ng Pilipinas (BSP), it deposited to ESHC the amount of P1,000,000,000 to be applied to future subscription to an increase in capital stock; that subsequently, as required by the BSP Manual of Regulations for Banks and Financial Intermediaries, EPCIB filed with the BSP, an application, requesting approval to make an additional investment in the subsidiary company ESHC; that the amount was recorded by ESHC as a separate account under the capital account section as "Deposit for Future Subscription of Capital Stock"; and that on April 21, 1999, EPCIB was advised by BSP of the disapproval of the request to place additional investment of P1,000,000,000 in its subsidiary ESHC; that therefore the plan to apply the amount of deposit for future subscription could not be completed and had to be set aside. Based on the foregoing, you now request for a confirmation of your opinion that the amount of P1,000,000,000 deposited by EPCIB to its subsidiary company ESHC to be applied for future subscription to an increase in capital stock upon receipt of the approval of the BSP is not subject to documentary stamp tax under Section 175 of the Tax Code of 1997. In reply thereto, please be informed that in CTA Case No. 5988 entitled First Southern Philippines Enterprises, Inc. vs. Commissioner of Internal Revenue promulgated on January 17, 2002 which became final and executory on February 13, 2002 per Entry of Judgment issued by Elvessa P. Apolinario, Executive Clerk of Court III of the CTA, it was held that deposit on stock subscription is not subject to the payment of documentary stamp tax . Just like in the aforecited case, the case at bar has no agreement to subscribe to the issuance of stock of ESHC. Section 60 of the Corporation Code defines a subscription contract as " any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. " At the time the funds were transferred to the subsidiary, ESHC, the approval of the investment by the regulatory authority (BSP) which is required under the BSP Manual of Regulations had not been secured. And on April 21, 1999, much as ESHC would like to consummate the perfection of the subscription contract, the BSP disapproved the request of EPCIB to place additional capital in ESHC. On the other hand, capital stock issued connotes permanence of funds flowing into a corporation which cannot be withdrawn. The phrase " issuance of shares of stock " upon which the documentary stamp tax is to be computed must likewise be viewed as permanent in character. It is considered as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Consequently, to be so categorized, all conditions and requirements, such as the execution of the subscription agreements, and approval by regulatory authorities must be secured to facilitate the issuance of the shares of stock. The Government stands to lose nothing in imposing the documentary stamp tax only on those stock certificates issued, or wherein the stockholders can freely exercise the attributes of ownership and with value at the time they are originally issued. As regards those certificates of stocks temporarily subject to suspensive conditions, they shall be liable for said tax only when released from said conditions, for then and only then shall they truly acquire any practical value for their owners. cITAaD In the instant case, the party making the deposit does not acquire the status of a shareholder by reason thereof. For lack of proper attributes conferring shareholder treatment, the deposit a) is not entitled to the receipt of any dividend; b) is not included in the determination of quorum at meetings, nor in the counting of votes requiring shareholder action; c) is not eligible to be voted upon; and d) in general, cannot exercise stockholders rights or privileges. A person who owned shares of stock and who desires to be recognized as a stockholder, for the purpose of voting must secure such a standing by having its ownership recorded upon the books of the corporation. Moreover, this position was adopted in RMO 8-98 "Institutionalizing the Corporate Stock Documentary Stamp Tax Program", in relation to R.A. No. 8424 which clarified that " what is being taxed is the privilege of issuing shares of stock, and therefore, the taxes accrue at the time the shares are issued. Further, issuance means the point at which the stockholder acquires and may exercise attributes of ownership over the stocks ". Viewed from the foregoing, it can be inferred that future subscription to an increase in capital stock is not an original issue of shares of stock nor is it a sale or transfer of shares of stock contemplated under Sections 175 and 176 of the Tax Code of 1997, but it is a standard accounting term which refers to an amount of money transmitted by a stockholder to a corporation on deposit with the possibility of the same being later subscribed in the company's capital. Accordingly, your opinion that the amount of P1,000,000,000 deposited by EPCIB to its subsidiary company ESHC to be applied for future subscription to an increase in capital is not subject to documentary stamp tax under Section 175 of the Tax Code of 1997 is hereby confirmed. 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.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue