BIR Ruling No. 020-80

October 8, 1980 BIR RULING NO. 020-80 034-00 000-00 20-80 Carlos J. Valdes & Co. 1130 Perez Street Paco, Manila Attention : Mr . Romeo C . Alba Partner Gentlemen : This refers to your letter dated April 29, 1980 stating that your client, Gonzalo Puyat & Sons, Inc. (GONPU), a domestic corporation duly registered with the Securities and Exchange Commission and with postal address at 190 Rodriguez Arias Street, San Miguel, Metro Manila sold in 1977 certain capital assets and invested the entire proceeds thereof in new issues of the capital stock of a registered BOI enterprises, which investment entitled GONPU to capital gains tax exemption under Section 5(b) of Republic Act No. 5186; that GONPU now plans to enter into a contract to sell the aforesaid shares, the ownership of which will not be transferred to the buyer until the full payment of the purchase price which will coincide with the lapse of the 5-year holding period; and that GONPU will execute and deliver to the buyer an irrevocable special power of attorney to exercise voting and all other rights except that of receiving the stock and cash dividends pertaining to the shares of stock. cdti However, you would like to be informed on the following questions: (1) If our client will sell the subject shares of stock before the lapse of five years after acquisition thereof and the proceeds invested in other BOI registered enterprise within six months from the date of the sale, will it lose its capital gains exemption? If it will not, but because it is unable to invest the proceeds within the 6-month period, can the proceeds be deposited in escrow until such time that it can be invested in other BOI registered enterprises, and still not lose its capital gains tax exemptions? (2) Assuming that the shares were made the subject of a contract to sell before the 5-year holding period has elapsed and the notes receivable of the buyer discounted by the company, will Gonpu still enjoy the tax exemptions? (3) If instead of discounting the promissory notes, a loan will just be extended by the buyer to Gonpu, will our client still enjoy the tax exemption? In reply thereto, I have the honor to inform you that Section 5(b) of Republic Act No. 5186 provides: Sec. 5. Incentives to Investors in a Registered Enterprise . An investor, with respect to his investment in a registered enterprise, shall be granted the following incentive benefits: xxx xxx xxx (b) Capital Gains Tax Exemption . Exemption from income tax on that portion of the gains realized from the sale, disposition, or transfer of capital assets, as defined in Section thirty-four of the National Internal Revenue Code, that corresponds to the portion of the proceeds of the sale that is invested in new issues of capital stock of a registered enterprise within six months from the date the gains were realized: Provided, (1) that the said sale, disposition or transfer and the investment of the proceeds thereof have been registered with the Board and the Bureau of Internal Revenue; and (2) that the shares of stock representing the investment are not disposed of, transferred, assigned, or conveyed for a period of five years from the date the investment was made. If such shares of stock are disposed of within the said period of five (5) years, all taxes due on the gains realized from the original transfer, sale or disposition of the capital assets shall immediately become due and payable .(Emphasis supplied) The aforequoted provision of law prohibits the transfer, assignment or conveyance of the shares of stock representing the investment if the owner thereof is divested of ownership before the lapse of the five-year period reckoned from the date the investment was made. Consequently, even if GONPU enters into a contract to sell the stocks, the original capital gains tax exemption is not lost as long as GONPU is not fully paid and, therefore, remains to be the owner of the stocks before the lapse of the five-year period. However, if payment has been made before the lapse of the five-year period and only a minimal balance was paid thereafter, the sale can be construed as having been effectively consummated before the said period expired, in which case, the exemption is lost. As regards the other questions raised in your letter, please be informed as follows: 1. The exemption from the capital gains tax, as provided in above-quoted provision, is one of the incentives granted to investors in order to attain the declared policy of the State to encourage them to invest in enterprises registered with the Board of Investments. However, in order that such investments shall remain with the registered enterprise for at least a certain period, the law prohibits the disposition, transfer, assignment or conveyance of the investments represented in stocks for said period, which is five (5) years from the date the investment was made. Such being the case, the prohibition is not violated and the exemption from capital gains tax is not lost even if the investor disposes of his stocks before the lapse of the five-year period, provided that the proceeds of such disposition are immediately invested in new issues of stocks in another BOI registered enterprise. In other words, in order to maintain the capital gains tax exemption, there shall be no interruption as regards the utilization of the proceeds of original sale from one registered enterprise to another within the five-year period. Hence, if the proceeds is not invested immediately in another registered enterprise, but are deposited in escrow, the capital gains tax exemption is lost. It is understood in this connection, that the tax exemption refers only to the gain derived out of the proceeds of original sale of capital assets invested in the registered enterprise. Consequently, if the proceeds derived by GONPU from the disposition of its stocks before the lapse of the five-year period exceeded its investment, the excess is subject to capital gains tax. 2. GONPU's capital gains tax exemption will not be impaired provided that after receiving and discounting the notes receivable given by the purchaser of the shares, GONPU does not, in effect, receive the full payment of the purchase price of the shares before the five-year holding period has elapsed, divesting it of the ownership of said shares. 3. GONPU still enjoys the tax exemption even if, instead of discounting the promissory note, a loan is extended by the buyer to GONPU with the stocks as collateral. However, the tax exemption is lost if the stocks are foreclosed and acquired by new owners before the lapse of the five-year period prescribed in Section 5(b) of R.A. No. 5186. Very truly yours, ROMULO M. VILLA Acting Commissioner