A Resident Foreign Corporation Wholly-Owned by a Single Corporation is Not a Closely Held Corporation for Purposes of the 10% Corporate Development Tax

July 20, 1981 BIR RULING NO. 109-81 24-e 000-00 109-81 Atty. Juan M. Castillo 2nd Floor, Midland Plaza Condominium Adriatico St., Ermita, Manila S i r : This refers to your letter dated July 1, 1981 requesting confirmation of your opinion that the 10% corporate development tax imposed by Section 24(e) of the Tax Code, as amended by Presidential Decree No. 1773, does not apply to your clients, PILIPINAS SHELL PETROLEUM CORPORATION, and SHELL DISTRIBUTION CO., INC. You have represented that your said clients, both domestic corporations, are wholly-owned by a foreign shareholder, Shell Petroleum Co., Ltd.; that the latter, in turn, is owned by two (2) corporate shareholders, Royal Dutch Petroleum Co. (40%) and Shell Transport and Trading Co. (60%); and that the stocks of said two (2) companies are listed in the stock exchanges in London and New York. In reply, I have the honor to inform you that this Office has already ruled that in the case of a resident foreign corporation which is wholly-owned by a single corporation, the former is not a closely held corporation insofar as the 10% corporate development tax is concerned, since it is deemed to be owned indirectly by the shareholders (numbering more than twenty (20) persons of the mother company. (BIR Ruling No. 24-e-000-00-55-81 dated March 23, 1981). In further support of said ruling, this Office cited Section 2(c) of Revenue Regulations No. 7-81 dated March 16, 1981 which provides: cdta "Sec. 2. . . . "xxx xxx xxx "(c). Stock ownership by a person, other than an individual . In determining whether a person, other than an individual, such as a juridical person, owns a share of stock in a corporation, directly or indirectly, the rule of attribution of stock ownership prescribed by a paragraph (a) of Section 66 shall be applied. Thus in cases of stock not owned by individuals, stock owned directly or indirectly by or for a corporation, estate or trust shall be considered as being owned proportionately by its shareholder, partners or beneficiaries. Under this rule, a subsidiary of a local and foreign corporation shall not be considered as owned by a parent corporation but by the shareholders of the said parent corporation ." Under the above-quoted underlined portion of the regulations, it would seem that for purposes of the 10% corporate development tax, it is not warranted to go beyond the shareholders of the parent corporation in a case where the said shareholder is, likewise, a corporation. However, we find that under the attribution rule prescribed in Section 66 (A) of the Tax Code, which has been applied in the regulations implementing the 10% corporate development tax, it is legally possible to go beyond the said shareholders of the parent corporation. Section 224 of Revenue Regulations No. 2 implementing Section 66(a) of the Tax Code provides: "Sec. 224. Stock not owned by individual . Determining the ownership of stock for any of the purposes set forth in the preceding section, stock owned 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. For example, if A and B, two individuals, are the exclusive and equal beneficiaries of a trust or estate, and if such trust or estate owns the entire capital stock of the M Corporation, and if the M Corporation in turn owns the entire capital stock of the N Corporation, then the stock of both the M Corporation and the N Corporation shall be considered as being owned equally by A and B as the individuals owning the beneficial interest therein . (Emphasis ours) From the foregoing example, it is clear that although the stockholder of the parent corporation (M) is a trust or estate, the individuals owning the trust or estate are considered the owners of the stocks of both the parent (M) and the subsidiary (N). In the same vein, it can be safely said that if the stockholder of the parent corporation is also a corporation, the individuals owning the stocks in said corporation are considered the owners of the stock of both the parent corporation and the subsidiary. In the present case, Shell Petroleum, the foreign parent company of Filipinas Shell and Shell Distribution, is owned by corporate stockholders, Royal Dutch and Shell Transport. Accordingly, the owners of the stocks of Royal Dutch and Shell Transport which stocks are both listed in foreign stock exchanges are considered the owners of the stocks not only of Shell Petroleum, but also of your clients, Filipinas Shell and Shell Distribution. Such being the case, your clients are not closely-held corporations, hence they are not subject to the 10% corporate development tax. Very truly yours, RUBEN B. ANCHETA Acting Commissioner