Listing of Shares of New Holding Firm with PSE on Sun Life's Proposed Demutualization Not Subject to IPO Tax

March 25, 1999 BIR RULING NO. 035-99 127 (B)-000-00-035-99 Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30/F Citibank Tower 8741 Paseo de Roxas Makati City Attention: Attys . Cynthia Roxas-del Castillo Edmundo P . Guevara & Jayson L . Fernandez Gentlemen : This refers to your letter dated December 22, 1998 requesting for a ruling to the effect that the listing of shares of a new holding company (HoldCo) of Sun Life Assurance Company of Canada (SLAC) with the Philippine Stock Exchange (PSE) in connection with SLAC's proposed demutualization will not be subject to the IPO tax imposed under Section 127(B) of the National Internal Revenue Code of 1997 (NIRC). It is represented that SLAC is a mutual life insurance company organized and existing under the laws of Canada; that it carries on insurance business in Canada and internationally through branches, mainly in the United States, the United Kingdom, the Philippines and Hong Kong; that SLAC has been doing business in the Philippines through its branch office since 1895; that its insurance products include policies which entitle policyholders to participate in the profits of the company (Participating Policies) and policies which do not so entitle the holders; that, being a mutual life insurance company, SLAC has no issued and outstanding shares; that Policyholders, through the purchase of Participating Policies, aside from the usual contractual rights to payment under the life insurance policy, acquire other proprietary rights and interests in SLAC, akin to that of a shareholder of a stock corporation; that these rights include the right to vote at meetings and to elect directors, the right to receive dividends or bonuses when declared by the Board of Directors and the theoretical right to participate in the remaining surplus of SLAC upon its liquidation; It is further represented that on January 27, 1998, the Board of Directors of SLAC announced that it had requested management to develop a plan for a worldwide reorganization whereby SLAC would convert from a mutual insurance company into an insurance company with common share capital through a process known as "demutualization";that a "demutualization";is a transaction or a series of transactions by which a mutual company converts into a corporation with share capital; that in a demutualization, eligible policyholders who possess membership rights surrender these rights in the mutual company in exchange for shares of the company or a company that holds all of the shares of the insurance company; that the main purpose of a demutualization is to simplify the capital structure of the mutual insurance company, to enhance the company's ability to raise capital and to permit its eligible policyholders to convert their membership rights into a marketable equity security; that, typically, the shares received by the eligible policyholders are listed on one more stock exchanges to facilitate their sale; that SLAC's demutualization will take place in accordance with regulations to be promulgated under Section 237 of the Canadian Insurance Companies Act (ICA) wherein SLAC's Canadian legal counsel expects that "Eligible Policyholders" will be defined as participating and other voting policyholders whose policies were in force on a specified date; that in order to implement its proposed demutualization, SLAC will take the following integrated steps: "(a) SLAC will organize HoldCo as a new stock company (initially as a wholly-owned subsidiary) with initial share capital of at least CDN $10 million pursuant to the ICA; "(b) HoldCo will issue common shares (representing the equity value of SLAC) to SLAC's eligible policyholders in exchange for the surrender of their membership rights in SLAC; "(c) SLAC will issue its shares to HoldCo; "(d) HoldCo will purchase for cancellation its shares which are held by SLAC;" that, as a result of the demutualization process, hundreds of thousands of Eligible Policyholders (tens of thousands of which are Philippine residents),will become shareholders of HoldCo; that HoldCo, in turn, will become the parent company of SLAC; that Eligible Policyholders who receive HoldCo shares will have the option of either retaining or selling their HoldCo shares; and that as a component of the demutualization process, it is expected that HoldCo shares will be listed on several stock exchanges worldwide, including the PSE. LexLib Based on the foregoing representations, you now request for confirmation of your opinion that the listing of shares of stock in HoldCo with the PSE in connection with the demutualization of SLAC will not subject to the IPO tax because HoldCo will not be a closely held corporation as defined under Section 127(B) of the NIRC. In reply thereto, please be informed that pursuant to Section 127 (B) of the NIRC stating: "SEC. 127. Tax on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public offering. (B) Tax on shares of stock sold or exchanged through initial public offering. There shall be levied, assessed and collected on every sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporation, as defined herein, a tax at the rates provided hereunder based on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed in accordance with the proportion of shares of stock sold, bartered, exchanged or otherwise disposed to the total outstanding shares of stock after the listing in the local stock exchange. Up to twenty-five percent (25%) 4% Over twenty-five percent (25%) but not over thirty three and one third percent (33 1/3%) 2% Over thirty-three and one third percent (33 1/3%) 1% The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondary offering. For purposes of this Section, the term "closely held corporation" means any corporation at least fifty percent (50%) in value of the outstanding capital stock of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is based on stock ownership, the following rules shall be applied . (1) Stock not Owned by Individuals . 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 . "xxx xxx xxx"(emphasis supplied) the IPO tax would apply only to corporations which are considered "closely held",meaning that at least 50% in value of the outstanding voting shares of all classes is owned directly or indirectly by or for not more than 20 individuals. In the case where the shares of stock in the corporation to be listed are owned by another corporation, such shares will be considered as being owned proportionately by the latter's shareholders. Since HoldCo would be wholly-owned by SLAC prior to demutualization and at the time the application to list the HoldCo shares is filed with the PSE, the corporate shareholding of SLAC in HoldCo will be considered as being proportionately held by SLAC's "shareholders". For this purpose, the Eligible Policyholders of SLAC may be considered shareholders contemplated under Section 127(B)(1) of the NIRC, it being defined in Section 22(M) of the NIRC that: "(M) The term "shareholder" shall include holders of a share/s of stock, warrant/s and/or option/s to purchase shares of stock of a corporation, as well as a holder of a unit of participation in a partnership (except general professional partnerships),in a joint-stock company, a joint account, a taxable joint venture, a member of an association, recreation or amusement club (such as golf, polo or similar clubs),and a holder of a mutual fund certificate, a member in an association, joint-stock company, or insurance company ."(emphasis supplied) Since the members of SLAC, who would effectively be considered as shareholders of the company, consist of hundred of thousands of Eligible Policyholders, HoldCo will not be a "closely held corporation" prior to SLAC's demutualization. Moreover, the listing of HoldCo shares with the PSE is expected to occur shortly after SLAC's demutualization becomes effective. Thus, even after SLAC's demutualization, HoldCo would not qualify as a "closely held corporation" because the shares of HoldCo will have been issued to hundreds of thousands of Eligible Policyholders of SLAC at the time the HoldCo shares are listed with the PSE. Accordingly, this Office is of the opinion as it hereby holds that the listing of shares of stock in HoldCo with the PSE in connection with the demutualization of SLAC will not be subject to the IPO tax because, at all material times both before and after demutualization, HoldCo will not be a closely held corporation as defined under Section 127 (B) of the NIRC. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon its investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue