Recognition of Gain or Loss on Transfer of Branch Business to a Domestic Corp. in Exchange for Shares of Stock

April 19, 1999 BIR RULING NO. 053-99 40 (C) (2)-172-98-053-99 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr . Joel L . Tan Torres Tax Division Gentlemen : This refers to your letter dated October 27, 1998 requesting on behalf of your client, SUN LIFE ASSURANCE COMPANY OF CANADA (SLAC) , for a ruling that no gain or loss shall be recognized on the transfer of its branch business in the Philippines to a domestic corporation ("Philco"), in exchange for shares of stock of the latter, since, as a consequence of the exchange, SLAC gains control of Philco. LibLex It is represented that SLAC is a mutual life insurance company organized and existing under the laws of Canada; that it was originally incorporated as a corporation with share capital by Special Act of Parliament in 1865, but was converted into a mutual company in 1962; that its Special Act was replaced in 1992 by letters patent issued under the Canadian Insurance Companies Act (the "ICA"); that SLAC carries on insurance business in Canada and internationally through branches, mainly in the United States, the United Kingdom, the Philippines and HongKong; that SLAC has been doing business in the Philippines through its branch office since 1895; that Philco is a domestic corporation which will be organized and registered with the Securities and Exchange Commission; that SLAC is currently undergoing a worldwide business reorganization, otherwise known as a "demutualization"; that a "demutualization" is a transaction or a series of transactions by which a mutual life insurance company converts into a stock corporation; that as part of its demutualization process, SLAC will establish CanHoldCo, a wholly owned holding company organized under the laws of Canada; that the creation of CanHoldCo will result in the optimal corporate structure for the Sun Life group of companies because it affords the greatest on-going flexibility for future financing which can be done through CanHoldCo or SLAC; that for these and other reasons, most major demutualization that have occurred in the United State and the United Kingdom involved holding companies; that as part of its business reorganization, SLAC shall transfer its Philippine branch business including all assets to Philco in consideration for Philco's assumption of all branch liabilities and its issuance of approximately 99.99% of its capital stock; that PhilCo's real property interest does not exceed 50% of its total assets; and that in connection with the ongoing reorganization, SLAC will transfer the shares in PhilCo that it will receive to BVCo, a Netherlands subsidiary of SLAC. In connection therewith, you now request confirmation of the following: 1. No gain or loss shall be recognized both on the part of SLAC, the transferor, and Philco, the transferee, on the transfer by SLAC of its Philippine branch business in exchange for shares of stock in Philco, considering that after exchange and as a result thereof, SLAC will gain control of Philco, the transferee, in accordance with Section 40(C)(2) of the Tax Code; 2. The basis of the property transferred by SLAC in the hands of Philco shall be the same as the basis in the hands of SLAC; 3. The basis of the Philco shares in the hands of SLAC shall be the same as the basis of the property transferred to Philco; 4. SLAC shall not be considered to have withdrawn the remittable profits of its Philippine Branch when the same are transferred to Philco and therefore the 15% Branch Profits Remittance Tax (BPRT) on remittable profits of SLAC as of the date of transfer of its Philippine branch business to Philco shall not be imposed; 5. The transfer of assets of the Philippine branch to Philco shall not be subject to the 10% Value Added Tax pursuant to Section 4.100-5(b) of Revenue Regulations No. 7-95, as amended; 6. The transfer of Philco shares by SLAC to BVCo is exempt from Philippine income tax pursuant to Article 13(3) and (4) of the RP-Canada Tax Treaty; 7. Considering that the transfer of Philco shares will be made to BVCo, a wholly owned subsidiary of SLAC, there is no transfer of Philco shares to an unrelated third party. Therefore, the transfer of Philco shares to BVCo should not result in the 15% BPRT; 8. The transfer of its investments in shares of stock in domestic corporations by SLAC to Philco shall be subject to documentary stamp tax (DST) pursuant to Section 176 of the Tax Code. 9. The transfer of any real property by SLAC to Philco shall be subject to DST pursuant to Section 196 of the Tax Code; 10. The issuance of shares of stock by Philo to SLAC shall be subject to DST under Section 175 of the Tax Code; and 11. Finally, the transfer by SLAC of Philco shares to BVCo shall be subject to DST under Section 176 of the Tax Code. In reply, please be informed of the following: Section 40(C)(2) and (6)(c) of the Tax Code provides that no gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock in such 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 means ownership of stocks in a corporation possessing at least fifty-one percent of the total voting power of all classes of stock entitled to vote. Considering that SLAC shall gain control of Philco as a result of the exchange by owning approximately 99.99% of Philco's capital stock, no gain or loss shall be recognized in the transfer of its branch business consisting of assets and liabilities in exchange for Philco shares (BIR Ruling No. 210-91). Moreover, the basis of the property transferred by SLAC in the hands of Philco shall be the same as its basis in the hands of SLAC and that the basis of the Philco shares in the hands of SLAC shall be the same as the basis of the property transferred to Philco. LLjur If pursuant to the exchange transaction and as part of the consideration, the transferee corporation assumes the liability of the transferor or acquires from the transferor property subject to a liability, such assumed or acquired liability shall not be treated as money and/or other property, and shall not prevent the exchange from being tax free (see Sec. 34(c)(4)(a) of the Tax Code, as amended by P.D. 1773). If the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject to a liability, exceed the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset as the case may be. (Sec. 40 (c)(4)(b) of the Tax Code of 1997). The cost basis or value of the stocks received by the transferor of property subject to a liability, where the liability transferred and assumed by the transferee corporation does not exceed the transferor's basis of the original and/or acquisition cost or the property transferred, shall be the difference between the liability or liabilities assumed by the transferee corporation and the acquisition or original cost of the property transferred. On the other hand, where the total liabilities to be assumed by the transferee corporation exceed the original or acquisition cost of the property transferred, the excess shall be recognized as gain to the transferor and the value or cost basis of the stocks to the transferor shall be the difference between the original cost of the property transferred subject to a liability (plus the gain recognized to the transferor and the liability or liabilities assumed by the transferee corporation). SLAC shall not considered to have withdrawn the remittable profits of its Philippine Branch when the same are transferred to Philco. The 15% Branch Profits Remittance Tax (BPRT) under Section 28(A)(5) of the Tax Code of 1997, on remittable profits of SLAC as of the date of transfer of its Philippine branch business to Philco, shall not be imposed because there is effectively no withdrawal of profits by SLAC from the Philippines. cdlex Further, the insurance business of SLAC in the Philippines will continue to be maintained by Philco and that the funds and capital of SLAC's Philippine branch will not be remitted outside the Philippines. However, the BPRT shall be payable upon transfer of Philco shares in a taxable sale or other disposition to an unrelated third party. For this purpose, the liability to pay the BPRT shall be annotated on the pertinent certificate of stock as well as the Stock and Transfer Book of Philco. The BPRT shall likewise be payable when Philco is liquidated. The transfer of assets of the Philippine branch to Philco shall not be subject to the 10% Value Added Tax pursuant to Section 4.100-5(b) of Revenue Regulations No. 7-95, as amended which provides: "(b) Not subject to output tax . The VAT shall not apply to goods or properties existing as of the occurrence of the following: "1) Change of control of a corporation by the acquisition of a controlling interest of such corporation by another stockholder or group of stockholders, Example: transfer of property to a corporation for its shares of stock under Section 34(c)(2) and 6(c) of the Code." The transfer of Philco shares by SLAC to BVCo shall not be subject to Philippine income or capital gains tax pursuant to Article 13(3) and (4) of the RP-Canada Tax Treaty which provides that gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in the State. Section 2 of Revenue Regulations No. 4-86 defines the term "wholly" or "principally" as more than 50% of the entire assets in terms of value. Thus, considering that PhilCo's real property interest in the Philippines will consist of less than 50% of its total assets then, PhilCo is exempt from Philippines. (BIR Ruling No. 175-97). In which case, the transfer of Philco shares by SLAC to BVCo is exempt from Philippine income tax pursuant to Article 13(3) of the RP-Canada Tax treaty. Moreover, considering that the transfer of Philco shares will be made to BVCo, a wholly owned subsidiary of SLAC, there is no transfer of Philco shares to an unrelated third party. Therefore, the transfer of Philco shares to BVCo should not result in the 15% BPRT. LLpr Also, the transfer of its investments in shares of stock in domestic corporations by SLAC to Philco shall be subject to documentary stamp tax (DST) pursuant to Section 176 of the Tax Code. Likewise, the transfer of any real property by SLAC to Philco shall be subject to DST pursuant to Section 196 of the Tax Code based on the consideration or the fair market value, whichever is higher. The issuance of shares of stock by Philco to SLAC shall be subject to DST under Section 175 of the Tax Code. Finally, the transfer by SLAC of Philco shares to BVCo shall be subject to DST under Section 176 of the Tax Code. 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.) BEETHOVEN L. RUALO Commissioner of Internal Revenue