Publicly-held Corporation Not Subject to Improperly Accumulated Earnings Tax

August 29, 2002 BIR RULING NO. 035-02 Laya Mananghaya & Co. 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Remegio A. Noval Partner, Tax & Corporate Services and Atty. Ma. Georgina J. Soberano Director, Tax & Corporate Services Gentlemen : This refers to your letter dated February 19, 2002 starting that your client, Siemens Power Operations, Inc. (SPOI), is a duly organized domestic corporation which is 100% owned by Siemens A.G. (SAG), a corporation duly organized and existing under the laws of Germany; that SAG in turn, is a publicly-held international company whose stocks are held by approximately one million (1,000,000) shareholders; that of this multitude of shareholders, only one (1) entity, the Siemens Vermogensverwaltung GmbH, is known to hold more than five percent (5%) or to be exact, six and one-half percent (6.5%) of the capital; and that under German Law, any stock owner holding five percent (5%) or more of the capital of a company is required to report the same. Based on the foregoing representations, you now request for a ruling that SPOI, being a publicly-held corporation, is not covered by the improperly accumulated earnings tax prescribed in Section 29 of the Tax Code of 1997. In reply thereto, please be informed that Section 29 (A) and (B) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-2001, provides that in addition to other taxes imposed by Title II of the Tax Code of 1997, there shall be imposed for each taxable year a tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. Thus, this kind of tax is being imposed in the nature of a penalty to the corporation for the improper accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation. However, the improperly accumulated earnings tax shall not apply to, among others, publicly-held corporations. Under Sections 4 of Revenue Regulations No. 2-2001, closely-held corporations are those corporations at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held corporations. For purposes of determining whether the corporation is a closely-held corporation, it is provided that stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries. In BIR Ruling No. 025-2002 dated June 25, 2002, this Office ruled that: "Such being the case, since Abbott-Phils. is a wholly-owned subsidiary of Abbott-US, such shares will be considered as being owned proportionately by the Abbott-US shareholders. The ownership of a domestic corporation for purposes of determining whether it is a closely held corporation or a publicly held corporation is ultimately traced to the individual shareholders of the parent company . Thus, where at least 50% of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by at least 21 or more individuals, the corporation is considered publicly-held corporation as the term is defined under the Regulations." "Further, Section 29 of the Tax Code of 1997 provides, viz : "Sec. 29. Imposition of Improperly Accumulated Earnings Tax . (A) . . . (B) Corporations Subject to Improperly Accumulated Earnings Tax. (1) In General. The improperly accumulated earnings tax imposed in the preceding section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. (2) Exceptions. The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-held corporation; (b) Banks and other non-bank financial intermediaries; and (c) Insurance companies. xxx xxx xxx Accordingly, this Office confirms your opinion that Abbott-Phils. is considered a publicly-held corporation exempt from the Improperly Accumulated Earnings Tax (IAET), based on the representation that as of the year-end 2000, Abbott-US had 101,272 shareholders holding a combined 1,545,934,133 shares of common stock and the twenty largest shareholders of Abbott-US as of September 30, 2001 own an aggregate of 30.1 percent of Abbott-US' issued and outstanding shares." IN THE LIGHT OF ALL THE FOREGOING, this Office holds that since the parent company of SPOI is a corporation publicly listed in Germany, whose stocks are owned and held by more than 20 stockholders, SPOI is not subject to the 10% improperly accumulated earnings tax prescribed in Section 29 of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-2001. 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group