Exemption from the Payment of 10% Corporate Development Tax

March 23, 1981 BIR RULING NO. 055-81 24-e 000-00 055-81 A.M. Sison, Jr., & Associates 6th Floor, Rufino Building 6784 Ayala Avenue Makati, Metro Manila Attention: Atty . Antonio L . Cardino Gentlemen : This refers to your letter in behalf of your client, the Coca-Cola Export Corporation, dated February 18, 1981 requesting a ruling on whether your aforenamed client is subject to the 10% corporate development tax. cdt You represented that your client, foreign corporation incorporated in the State of Delaware, U.S.A. and duly licensed to engage in business in the Philippines as a manufacturer of concentrate and beverage base for soft drinks, is owned by Coca-Cola Company, likewise a U.S. corporation, the shares of stock of which are owned by more than twenty stockholders. Section 24(3) of the Tax Code, as amended by P.D. No. 1773 provides that the 10% corporate development tax shall be paid in addition to the normal corporate rates of 25%-35% by a domestic or a resident foreign corporation which qualifies as a closely-held corporation. The term "closely-held corporation" is defined as "any corporation (a) at least 50% in value of the outstanding stock or (b) at least 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 five persons, natural or juridical." Although at first glance your client (Coca-Cola Export Corporation) may seem to be a closely-held corporation, being wholly-owned by a single mother corporation (Coca-Cola Company), we find that your client is not a closely-held corporation insofar as the 10% corporate development tax is concerned. This is so because the shares of stock of your client, though owned as per its incorporation papers by one corporation, are deemed to be owned indirectly by the shareholders of the mother company. The owners of the shares of the mother company which number to more than twenty (20) persons, being the owners of its shares of stock, your client therefore is not a closely-held corporation. This is in consonance with the "grandfather rule" adopted in the Philippines, as evident in Section 96 of the Corporation Code (Batas Pambansa Blg. 68) which provides that notwithstanding the fact that all the issued stock of a corporation are held by not more than twenty persons, among others, a corporation is nonetheless not to be deemed a close corporation when at least two-thirds of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation. The conclusion that your client is not a closely-held corporation finds further support in the provision of Section 66 (a) of the Tax Code which although to be employed for purposes of ascertaining whether a corporation is a personal holding company but which could similarly be applied in attributing stock ownership, stock owned directly or indirectly by a corporation shall be considered as being owned proportionately by its shareholders. Thus, the stockholdings of Coca-Cola Company in your client are deemed to be the stockholdings of the shareholders of the said Coca-Cola Company. (Sec. 2(c), Rev. Reg. No. 7-81, March 16, 1981). Moreover, this interpretation is consistent with the announced governmental policy of encouraging investments. In view thereof, this Office does not consider your client a closely-held corporation; hence, it is not subject to the 10% corporate development tax prescribed under Section 24(e) of the Tax Code, as amended by Presidential Decree Number 1773. Very truly yours, RUBEN B. ANCHETA Acting Commissioner