Rules on Stock Attribution Laid Down by the Bureau of Internal Revenue in BIR Ruling Nos. 109-81 and 250-81 are Applicable Likewise, in Determining Whether a Corporation, for Purposes of the Tax on Shares of Stock Sold or Exchanged through Initial Public Offering (IPO Tax) is a "Closely Held Corporation"

July 2, 1997 BIR RULING NO. 072-97 124-A 000-00 072-97 Tan and Venturanza 2704 East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Ms . Gracia M . Pulido-Tan Gentlemen : This refers to your letter dated July 5, 1996 requesting confirmation of your opinion to the effect that the rules on stock attribution laid down by the Bureau of Internal Revenue in BIR Ruling Nos. 109-81 and 250-81 are applicable likewise, in determining whether a corporation, for purposes of the tax on shares of stock sold or exchanged through initial public offering (IPO Tax) is a "closely held corporation". cdta In reply thereto, please be informed that Section 124-A (b) of the Tax Code, as amended provides as follows: SEC. 12-A. Tax on sale, barter or exchange of stock listed and traded through the local stock exchange or through initial public offering: (a) . . . (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 corporations, 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 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: 33 1/3% or below 4% Over 33 1/3% but below 50% 2% Over 50% 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 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". 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 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. (2) Family and partnership ownerships . An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family, or by or for his partner. For purposes of this paragraph, the family of an individual includes only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants. (3) Option . If any person has an option to acquire stock, such stock shall be considered has owned by such person. For purposes of this paragraph, an option to acquire such an option and each one of a series of options shall be considered as an option to acquire such stock. (4) Constructive ownership as actual ownership . Stock constructively owned by reason of the application of paragraph (1) or (3) shall, for purposes of applying paragraph (1) and (2), be treated as actually owned by such person; but stock constructively owned by the individual by reason of the application of paragraph (2) hereof shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. xxx xxx xxx BIR Ruling Nos. 109-81 and 250-81 issued on July 20 and December 3, 1981 refers to the imposition of the then 10% corporate development tax in addition to the then normal corporate rates of 25%-35% on domestic or resident foreign corporation which qualifies as a closely held corporation. In determining whether a corporation is a closely held corporation the attribution rule prescribed in then Section 66 (a) of the Tax Code as implemented by Section 224 of Revenue Regulations No. 2 which has been applied in the regulations implementing then 10% corporate development tax has been followed. Thus, in the case of multi-tiered corporation, the attribution rule must be allowed to run continuously along the chain of ownership until it finally reaches the individual stockholders. This is in consonance with the "grandfather rule" adopted in the Philippines under 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. Considering that the rules prescribed in Section 124-A of the Tax Code, as amended, and as implemented by Section 8 of Revenue Regulations No. 3-95 for purposes of determining whether a corporation is a closely held corporation insofar as stock not owned by individuals is concerned are almost verbatim copies of Section 224; 225 and 226 of Revenue Regulations No. 2 implementing then Section 66 (a) of the Tax Code which is being used in ascertaining whether a corporation is a personal holding company but which could similarly be applied in attributing stock ownership for purposes of the then 10% corporate development tax, the aforementioned rulings can be applied in determining whether a corporation for purposes of the tax on shares of stock sold or exchanged through initial public offering (IPO Tax) is a "closely held corporation". Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue