MPJ & W.A.C.E. Holding Corp.

July 27, 2018 BIR RULING NO. 1113-18 Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended; BIR Ruling No. 515-12 MPJ & W.A.C.E. Holding Corp. No. 8 Sta. Candida St. Ramos Compound Sun Valley, Paraaque City Attention: AAA _______________ Gentlemen : This refers to your letter dated October 12, 2012, requesting for the issuance of a Certificate of Tax Exemption of transfer of properties as a tax free exchange pursuant to Section 40 (C) of the 1997 Tax Code, as amended, in relation to Revenue Regulations (RR) No. 18-2001, Revenue Memorandum Order (RMO) No. 32-2001 and Legal Memorandum dated April 26, 2010. acEHCD Documents submitted show that MPJ & W.A.C.E. HOLDING CORP. is a corporation duly organized and existing under Philippine laws, and duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. CS201008124; that it has an original authorized capital stock of One Million Pesos (P1,000,000.00) divided into One Million (1,000,000) shares with a par value of One Peso (P1.00) per share; that the incorporators of the corporation with their corresponding shares subscribed and paid-up are as follows: Subscriber No. of Shares Amount Subscribed Amount Paid Manuelito P. Jugueta 750,000 P750,000.00 P187,500.00 John Andrey DT. Jugueta 62,500 62,500.00 15,625.00 John Christian DT. Jugueta 62,500 62,500.00 15,625.00 John Edward DT. Jugueta 62,500 62,500.00 15,625.00 Wilma DT. Jugueta 62,500 62,500.00 15,625.00 Total 1,000,000 P1,000,000.00 P250,000.00 that MPJ & W.A.C.E. HOLDING CORP. increased its authorized capital stock from One Million Pesos (P1,000,000.00),divided into One Million (1,000,000) shares with a par value of One Peso (P1.00) per share, to Twenty Million Pesos (P20,000,000.00) divided into Twenty Million (20,000,000) shares with a par value of One Peso (P1.00) per share; and that the net increase in authorized capital stock of P19,000,000.00 has been actually subscribed by the subscribers; and that the amount of P17,128,919.00 has been paid in cash via conversion of liabilities into equity and real properties. Manuelito P. Jugueta is the registered owner of the following properties, to wit: EcTCAD NATURE OF PROPERTY/IES TCT NO. TAX DECLARATION NO. SUBSTITUTED BASES Land 139707 E-014-07095 764,000.00 Land 139708 E-014-07094 920,000.00 Improvement E-014-13051 155,610.27 Land 164209 E-014-11411 2,160,000.00 Land 010-2010000894 E-014-14273 3,240,000.00 Land 23087 E-007-03532 80,000.00 Improvement E-007-03533 39,899.73 Land 164565 E-007-10596 2,775,000.00 Land T-746147 11-0016-03950 8,290,172.00 TOTAL P18,424,682.00 On the other hand, Wilma DT. Jugueta is the co-owner of property covered by TCT No. T-746147. The above-named assignors executed separate Deeds of Exchange dated July 3, 2012 in favor of MPJ & W.A.C.E. HOLDING CORP.,whereby they transferred their respective properties in exchange for the latter's 6,144,800 shares of stock, broken down as follows: NAME OF STOCKHOLDER NO. OF SHARES TO BE ISSUED Manuelito P. Jugueta 3,623,380 Wilma DT. Jugueta 2,521,420 that before the transfer of real estate properties, the number of voting shares issued to Manuelito P. Jugueta is 8,171,619 consisting of 750,000 during initial incorporation and in conversion of cash advances and loan into equity in the amount of P2,984,119.00 and P4,437,500.00, respectively, at issued price of P1.00 per share; that after the transfer of real estate properties amounting to P3,623,380.00, the total number of his voting shares increased to 11,794,999. Whereas, the number of voting shares issued to Wilma DT. Jugueta is 62,500 during initial incorporation and increased to 2,583,920, after the transfer of real property amounting to P2,521,420.00, at issued price of P1.00 per share and that as a result of the transfer, Manuelito P. Jugueta will gain control of MPJ & W.A.C.E. HOLDING CORP. by owning 92.9% of the total voting stocks of the said corporation while Wilma DT. Jugueta, Jr. will own 5.6% as follows: Subscriber No. of Shares Amount Subscribed % of Ownership Manuelito P. Jugueta 11,794,999 P11,794,999 92.9% John Andrey DT. Jugueta 62,500 62,500.00 0.5% John Christian DT. Jugueta 62,500 62,500.00 0.5% John Edward DT. Jugueta 62,500 62,500.00 0.5% Wilma DT. Jugueta 710,925 710,925.00 5.6% Total 12,693,424 P12,693,424.00 100% In reply thereto, please be informed that pursuant to Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended, no gain or loss shall be recognized if a 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, gain 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 transferor. 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. In short, combining all the shares to be received by the transferors, the same should total to at least 51% of the voting power of all classes of stocks of transferee corporation entitled to vote. (BIR Ruling No. 515-12 dated August 3, 2012) SDHTEC Applying the afore-quoted provision it is clear that with the exchange of the properties of Manuelito P. Jugueta alone, he already gains control of MPJ & W.A.C.E. HOLDING CORP.,as he acquires 92.9% of the outstanding capital stocks. Hence, no gain or loss shall be recognized with respect to the transfer of properties by Manuelito P. Jugueta in exchange for shares of stock of the transferee corporation. There is no need to combine the shares of Manuelito P. Jugueta with that of the other transferor to determine the 51% stock ownership because, as aforestated, his shares alone are more than 51% of the total outstanding capital of stocks of MPJ & W.A.C.E. HOLDING CORP. Accordingly, the transfer of Wilma DT. Jugueta shall be treated as a separate transfer subject to capital gains tax under Section 24 (D) of the Tax Code of 1997, as amended and documentary stamp tax under Section 175 of the same Code. Pursuant to Section 199 (m) of the Tax Code of 1997, as amended by Republic Act (RA) 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). Accordingly, the transfer by Manuelito P. Jugueta of his real properties to MPJ & W.A.C.E. HOLDING CORP. is not subject to DST under Section 175 of the Tax Code of 1997, as amended. However, the shares to be issued by MPJ & W.A.C.E. HOLDING CORP. are original issues subject to the documentary stamp tax imposed by Section 174 of the Tax Code of 1997, as amended, which shall attach upon acceptance by the corporation of the stockholder's subscription regardless of the actual delivery of the certificates of stock. HSAcaE Moreover, the transfer of real properties (TCT Nos. 139707, 139708, 164209, 010-2010000894 and 164565) of Manuelito P. Jugueta, doing business under the name of Aeropac Equipment Rental, Sales & Services, to MPJ & W.A.C.E. HOLDING CORP. is subject to VAT based on the zonal value thereof as determined by the Commissioner or the fair market value as shown in the schedule of values of the Provincial and City Assessors, whichever is higher. Revenue Regulations No. 10-2011 provides that: "the exchange of goods or properties including the real estate properties used in business or held for sale or for lease by the transferor, for shares of stocks, whether resulting in corporate control or not, is subject to VAT." It should be emphasized, however, that Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended, merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the property or of the stocks involved in the exchange, the original or historical cost of the property or stocks is considered. Thus, if MPJ & W.A.C.E. HOLDING CORP. later sells or exchanges the real properties it acquired in the exchange, it shall be subject to income tax on the gains it derived from such sale or exchange, taking into consideration that the cost basis of the shares shall be the same as the original acquisition cost or adjusted cost basis to the transferors of the properties exchanged therefor; and that the cost basis to the transferee of the properties exchanged for stocks shall be the same as it would be in the hands of the transferors. [Sec. 40 (C) (5) (a) and (b) of the 1997 Tax Code] In this regard, the Certificate Authorizing Registration/Tax Clearance (CAR/TCL) for the real properties or share of stock/unit of participation/interest involved in the exchange shall be issued by the Revenue District Officer (RDO)/Authorized Internal Revenue Officer (AIRO) on the basis of this ruling to the effect that the transaction qualifies as a tax-free exchange under Section 40 (C) (2) of the National Internal Revenue Code of 1997 (Tax Code of 1997), specifying, among others that the transaction involved is a tax-free exchange under Section 40 (C) (2) of the Tax Code of 1997; the date of exchange; and the substituted basis of the properties. Upon issuance of this letter of exemption, and upon issuance of CAR, following information is required to be annotated on the reverse side of the Transfer Certificate of Title by the Register of Deeds having jurisdiction over the properties: AScHCD NATURE OF PROPERTY/IES TCT NO. TAX DECLARATION NO. SUBSTITUTED BASES Land 139707 E-014-07095 764,000.00 Land 139708 E-014-07094 920,000.00 Improvement E-014-13051 155,610.27 Land 164209 E-014-11411 2,160,000.00 Land 010-2010000894 E-014-14273 3,240,000.00 Land 23087 E-007-03532 80,000.00 Improvement E-007-03533 39,899.73 Land 164565 E-007-10596 2,775,000.00 Land T-746147 11-0016-03950 8,290,172.00 TOTAL P18,424,682.00 The substituted bases of the shares of stock received by the transferors in exchange for property shall be as follows: NAME OF TRANSFERORS NATURE OF PROPERTY/IES ALLOCATION OF SHARES SUBSTITUTED BASES Manuelito P. Jugueta Land 334,306 764,000.00 Manuelito P. Jugueta Land 277,620 920,000.00 Manuelito P. Jugueta Improvement 261,783 155,610.27 Manuelito P. Jugueta Land 678,302 2,160,000.00 Manuelito P. Jugueta Land 1,143,424 3,240,000.00 Manuelito P. Jugueta Land 835,281 80,000.00 Manuelito P. Jugueta Improvement 241,640 39,899.73 Manuelito P. Jugueta Land 1,075,594 2,775,000.00 Manuelito P. Jugueta Land 648,425 4,145,086.00 Wilma DT. Jugueta 648,425 4,145,086.00 TOTAL 6,144,800 P18,424,682.00 In addition to the foregoing requirements, the assignors and MPJ & W.A.C.E. HOLDING CORP. shall enclose with their respective income tax returns for the taxable year in which the tax-free exchange occurred a copy of the request for ruling filed with, and the corresponding ruling issued by the Bureau of Internal Revenue, both duly stamped received by the appropriate office of the Bureau of Internal Revenue. Such persons shall include as a note to their respective audited financial statements for the taxable year in which the exchange occurred a statement to the effect that they hold such assets/shares acquired in a tax-free exchange and the year in which such exchange occurred, and in the taxable years until the subject property are subsequently transferred to another transferee. It is required that within ninety (90) days from receipt of this ruling, the parties to the transaction must submit to the Law and Legislative Division, Bureau of Internal Revenue, a certified true copy of the TCT that bears the annotation of substituted basis of the real properties transferred/received in connection with this transaction, in respect of the transferred real properties. HESIcT This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue