Tax Treatment of the Issuance of Additional Shares of Stocks by KSA Realty Corp. to Rodamco Phil.

April 27, 1999 BIR RULING NO. 058-99 Sec. 36 RR No. 2; 175-000-00-058-99 SGV & Co. 6760 Ayala Avenue Makati City Attention: Mr . Joel L . Tan Torres Tax Division Gentlemen : This refers to your letter dated November 16, 1998, requesting on behalf on your client, KSA Realty Corporation (KSA), for a ruling on the tax treatment of the issuance of additional shares of stocks by KSA to Rodamco Philippines B.V. (RPBV). It is represented that KSA is a domestic corporation engaged in the business of property holding and development; that it is currently undertaking the construction of a high-rise building to be known as The Enterprise Center , located at the corner of Paseo de Roxas and Ayala Avenue, Makati City; that in connection with the above-mentioned project, KSA entered into an investment agreement with Rodamco Philippines B.V. (RPBV), a private limited company organized and existing under the laws of Netherlands; that in consideration for the investment of RPBV in KSA, the latter has undertaken to complete The Enterprise Center ; that pursuant to the Investment Agreement in 1995, RPBV subscribed, at a premium price, 241,580 shares of stock representing 20% of the total equity of KSA; that RPBV has fully paid the said subscription in the total amount of One Billion Five Hundred Sixty Five Million Pesos (P1,565,000,000); that the amount of RPBV's investment was recorded as P241,580,000 of capital stock (at its par value) and P1,323,420,000 of additional paid-in capital (APIC); that because of cost overruns in the construction of The Enterprise Center , KSA plans to undertake a preemptive stock rights offering in order to raise P1,500,000,000; that all the existing stockholders of KSA, including RPBV, will subscribe to additional shares of KSA, however, unlike the other stockholders, RPBV will not make any payments to KSA for any additional shares that it will receive as a result of the stock rights offering, pursuant to Section 6.5(b) of the Investment Agreement; that the said provision of the Investment Agreement provides that in the event that cost overruns and/or funding shortfalls (whether caused by design errors or inconsistencies or escalation in the prices of materials and services) are incurred in the course of completing The Enterprise Center in accordance with the Building Plans such that additional funding would be required (i.e., after cash on hand and in bank at the date of this Agreement, RPBV's equity contributions, proceeds from the acquisition of two floors by shareholders and lease deposits (i.e.., security deposits and rental deposits) have been used up), such shortfalls shall be funded solely through additional equity contributions from the existing shareholders of KSA, which additional equity calls should not in any way reduce RPBV's interest to a level below twenty percent (20%) of the total equity, as the same may be adjusted pursuant to Section 5.2 here; if applicable; and that to effect the issuance of shares of stock to RPBV without it making payments to KSA, the latter will reclassify a portion of its APIC into capital stock. LLjur Based on the foregoing, you now request confirmation that 1. The issuance of additional shares of stocks by KSA to RPBV to be effected by the reclassification of the APIC to capital stock and undertaken for the purpose of maintaining the 20% equity to RPBV in KSA pursuant to the Investment Agreement provisions, shall not result in any income tax on the part of RPBV; 2. The issuance of additional shares to RPBV is subject to documentary stamp tax at the rate of Two Pesos for each Two Hundred Pesos of the par value of the said shares; and 3. The cost basis of RPBV for all the shares of stock of KSA, including the additional shares received as a result of the reclassification of KSA's APIC to capital stock, shall be the same amount of its original investment amounting to P1,565,000,000. In reply, please be informed that under Section 36 of Revenue Regulations No. 2, otherwise known as the " The Income Tax Regulations ", income is defined as follows: "Income in the broad sense, means all wealth which flows into the taxpayer other than mere return of capital. It includes the forms of income specifically described as gains derived from the sale or other disposition of assets." The issuance of additional shares of stock to RPBV for the purpose of maintaining its 20% equity holding in KSA is not a flow of wealth from KSA to RPBV, RPBV will not be enriched by the receipt of additional shares of KSA because in its books, investment in KSA will be maintained at the original cost of P1,565,000,000. There is therefore, no income to speak of that will result in the imposition of income tax. Accordingly, the issuance of additional shares of stocks by KSA to RPBV to be effected by the reclassification of the APIC to capital stock and undertaken for the purpose of maintaining the 20% equity of RPBV in KSA pursuant to the Investment Agreement provisions, shall not result in any income tax on the part of RPBV. Moreover, since RPBV will not pay anything for the issuance of the additional KSA shares, the cost basis of its capital investment in KSA will remain the same despite the increase in the number of KSA shares that it will hold, and RPBV's cost per share will be reduced. Accordingly, the cost basis of RPBV for all the shares of stock of KSA, including the additional shares received as a result of the reclassification of KSA's APIC to capital stock, shall be the same amount of its original investment amounting to P1,565,000,000. Finally, pursuant to Section 175 of the Tax Code, the issuance of additional shares to RPBV is subject to documentary stamp tax at the rate of Two Pesos (P2.00) for each Two Hundred Pesos (P200.00) of the par value of the said shares. 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