BIR Ruling No. 101-12

February 20, 2012 BIR RULING NO. 101-12 Sections 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended; 000-00 Labelworx, Inc. 30 Jasmin St., Malabon City Attention: Calixto U. Malapas Gentlemen : This refers to your letter dated May 30, 2011 requesting a confirmatory ruling of your opinion that the transfer of the real property by Fukuyama Manufacturing Corporation in favor of Labelworx Incorporated, solely in exchange for shares of stocks of the latter will neither result in a taxable gain or profit pursuant to Section 40 (C) (2) (c) of the Tax Code of 1997. It appears that Fukuyama Manufacturing Corporation is a corporation duly organized and existing under Philippine laws, with principal office address at 30 Jazmin Road, Malabon City. It has an authorized capital stock consisting of Ten Million (10,000,000) shares with a par value of One Hundred Pesos (P100.00) per share, of which Three Thousand (3,000) shares amounting to Three Hundred Thousand Pesos (P300,000.00) are issued and outstanding. On the other hand, Labelworx Incorporated is a corporation duly organized and existing under Philippine laws, with principal office address at 30 Jazmin Road, Malabon City. It has an authorized capital stock consisting of One Hundred Thousand (100,000) shares with a par value of One Hundred Pesos (P100.00) per share, of which Fifty Thousand (50,000) shares amounting to Five Million Pesos (P5,000,000.00) are issued and outstanding. TECIHD That on March 30, 2007, a Deed of Exchange was executed by Fukuyama Manufacturing Corporation whereby it transfer and assign to Labelworx Incorporated, a parcel of land, identified as Lot No. 10, Block 1 of the subdivision plan Psd-76303 being a portion of Lot 25-B-2A-1 of plan (LRC) Psd-86141, LRC Rec. No. 4429 covered by Transfer Certificate of Title (TCT) No. M-2669 issued by the Registry of Deeds for Malabon in exchange of 39,334 originally issued shares of stock as partial payment. The capital and shareholding structure of Labelworx Incorporated before the transaction shall be as follows: Subscriber No. of Amount Amount Shares Subscribed Paid Calixto U. Malapas 18,999 P1,899,900.00 P1,899,900.00 Jackson U. Malapas 11,999 1,199,900.00 1,199,900.00 Mckinley U. Malapas, Jr. 9,500 950,000.00 950,000.00 Samuel U. Malapas, Jr. 9,499 949,900.00 949,900.00 Hedy P. Malapas 1 100.00 100.00 Christine C. Malapas 1 100.00 100.00 Anita T. Malapas 1 100.00 100.00 Total 50,000 P5,000,000.00 P5,000,000.00 ======== =========== =========== Following the completion of the transfer and assignment of the Fukuyama Manufacturing Corporation to Labelworx Incorporated, the capital and shareholding structure of Labelworx Incorporated shall be as follows: Subscriber No. of Amount Amount Shares Subscribed Paid Calixto U. Malapas 18,999 P1,899,900.00 P1,899,900.00 Jackson U. Malapas 11,999 1,199,900.00 1,199,900.00 Mckinley U. Malapas, Jr. 9,500 950,000.00 950,000.00 Samuel U. Malapas Jr. 9,499 949,900.00 949,900.00 Hedy P. Malapas 1 100.00 100.00 Christine C. Malapas 1 100.00 100.00 Anita T. Malapas 1 100.00 100.00 Fukuyama Manufacturing Corp. 39,334 3,933,400.00 1,208,400.00 Total 89,334 P8,933,400.00 P6,208,400.00 ======== =========== =========== Subscriber % of Ownership Calixto U. Malapas 21.26% Jackson U. Malapas 13.43% Mckinley U. Malapas, Jr. 10.63% Samuel U. Malapas, Jr. 10.63% Hedy P. Malapas .001% Christine C. Malapas .001% Anita T. Malapas .001% Fukuyama Manufacturing Corp. 44.03% In reply, please be informed that pursuant to Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, no gain or loss shall be recognized if property is transferred to a corporation by a person, in exchange for stock in such a 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 mean ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stocks received i.e., total subscribed by the transferors. In determining the 51% stock ownership, only those persons who transferred property for stocks in the same transaction may be counted up to a maximum of five. Thus, the gain or loss shall be recognized on the transfer by Fukuyama Manufacturing Corporation in exchange for shares of stock of the transferee corporation, to Labelworx Incorporated, considering that as a consequence of the exchange, Fukuyama Manufacturing Corporation does not gain control of the transferee corporation by owning not more than 51% of its total voting stocks. Moreover, pursuant to Section 196 of the Tax Code of 1997, a conveyance or deed whereby land is assigned or transferred to another person is subject to documentary stamp tax based on the consideration or value received or contracted to be paid for such realty or on its fair market value determined in accordance with Section 6 (E) of the same Code, whichever is higher. However, under Republic Act (R.A.) No. 9243 which took effect on March 20, 2004, transfer of property pursuant to Section 40 (C) (2) of the 1997 Tax Code, as amended, is now exempt from the payment of documentary stamp tax (DST) under Section 196 of the Tax Code of 1997. Accordingly, the transfer by Fukuyama Manufacturing Corporation to Labelworx Incorporated, as in this case, is subject to DST under said section. In view of the foregoing, the request for ruling that the transfer of the real property by Fukuyama Manufacturing Corporation in favor of Labelworx Incorporated, solely in exchange for shares of stocks of the latter will neither result in a taxable gain or profit pursuant to Section 40 (C) (2) (c) of the Tax Code of 1997, is hereby denied for lack of legal basis. HCDAcE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue