Whether the Gain Resulting in the Exchange of Real Property of a Corporation for Shares of Stocks of Another Corporation is Not Subject to Income Tax as well as the Creditable Withholding Tax under Revenue Regulations No. 1-90

February 14, 1991 BIR RULING NO. 019-91 34 (c) (2) (c) 000-00 019-91 Gentlemen : This refers to your letter dated June 4, 1990 requesting a ruling that the gain resulting in the exchange of real property of a corporation for shares of stocks of another corporation is not subject to income tax as well as the creditable withholding tax under Revenue Regulations No. 1-90. cdta You represented that Chemical Industries of the Philippines, Inc. (CIP) is a management and holding company which owns shares of stocks in several companies; that CIP owns 72% of the shares of stocks of Chemphil-LMG, Inc. (CLI) and 99.99% of the paid up capital of Chemphil Specialty Chemicals Corporation (CSCC), that CLI owns a strategic property adjacent to its plant site in San Pascual, Batangas on which CSCC is presently building its own plant; that CLI has agreed to transfer the said property valued at Four Million and Two Hundred Thousand Pesos (P4,200,000.00) and covered by TCT No. T64511 in exchange for 2,100,000 shares of stock of CSCC with a par value of P1.00 plus a premium of P1.00 per share, and a Deed of Exchange was executed between said parties to effect such transfer; that CIP, CSCC, and CLI executed a Tri-Partite Deed of Assignment of Subscription Rights whereby CIP (Assignor) has assigned to CLI (Assignee) its subscription rights to the 2,100,000 unpaid shares of stock of CSCC (issuer) where the latter has agreed to issue the same shares of stocks to assignee in exchange for its aforementioned property in Batangas; that after the exchange, the composition of the CSCC capitalization shall be as follows: Authorized 80,000,000 shares Subscribed by CIP 17,900,000 CLI 2,100,000 CHEMPHIL GROUP 20,000,000 = 60% A & W 13,333,333 = 40% Total Subscription 33,333,333 = 100% ======== In reply thereto, I have the honor to inform you that pursuant to Section 34, paragraph (c) (2) (c) of the Tax Code as amended by Republic Act No. 4522 and P.D. Nos. 1705 and 1773, 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., total 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 same transaction may be counted up to a maximum of five, hence, in the instant case, CIP will not be counted as a transferor. Since after the proposed exchange, CLI will not gain control of the corporation, the aforesaid exchange is subject to the capital gains tax of 35% pursuant to Section 24 (a) in relation to Section 34(a) of the Tax Code. CLI, the transferor of real property, shall be subject to creditable withholding tax at the rate of 5% pursuant to Revenue Regulations No. 1-90. Moreover, pursuant to Section 196 of the Tax Code, as amended, a conveyance or deed whereby lend 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 Assignment executed to effect the aforesaid transfer (BIR Ruling No. 245-00-000-00-109-82 dated April 06, 1982). Furthermore, under Section 248(d) in relation to Section 173 of the Tax Code as amended by Executive Order No. 273, in case of failure to affix the documentary stamp 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 twenty-five percent (25%) of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Finally, the certificates of stocks to be issued by CSCC are, in all probability original issues, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. cdti Very truly yours, (SGD.) JOSE U. ONG Commissioner