Tax Consequence of the Proposed Transfer of All Shares of Stock

June 5, 1989 BIR RULING NO. 118-89 34 (c) (2) (c) 140-83 118-89 Gentlemen : This refers to your letters dated January 20 and February 6, 1989 requesting confirmation of your opinion that the exchange by your client, Commonwealth Industrial Gases, Ltd. (CIG) of its share of stock in Consolidated Industrial Gases, Inc. (CIGI) solely in exchange for all the voting stocks of a Philippine incorporated company (H. Co.) is tax-free under Section 34(c)(2) of the Tax Code; that the exchange is also exempt from income tax under Article 13(3) of the RP-Australian Tax Treaty; and that capital gains from the sale by CIG of its shares of stock in H. Co. are also exempt under Article 13(3) of the same Tax Treaty. It is represented that CIG is a resident company of Australia; that it is not engaged in trade or business in the Philippines; that it holds 40% of the equity in CIGI, a Philippine company; that instead of selling its shares in CIGI to a U. K. company or to a Philippine company, it opted to transfer all of its CIG shares solely in exchange for all the voting shares of stock of H. Co.; that later, it will sell all of its H. Co. shares to a U. K. company; and that the assets of H. Co. and CIG do not consist principally of real property. In reply, I have the honor to inform you that pursuant to Section 34, paragraph (c)(2)(c) of the Tax Code, as amended by Republic Act No. 4522 and P.D. Nos. 1705 and 1773, no gain or loss shall be recognized if property is transferred to a corporation, by a person in exchange for stock in such 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 fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stock received, i. e., subscribed, whether for property or for services, by the transferor or transferors. In determining the 51% stock ownership only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five. Accordingly, your opinion to the effect that no gain or loss shall be recognized both to the transferor and the transferee corporation on the proposed transfer by Commonwealth Industrial Gases, Ltd. of all its shares of stock of H. Co., considering that as a result of said exchange, Commonwealth Industrial Gases, Ltd., will gain control of H. Co., is hereby confirmed. Moreover, Article 13(3) of the RP-Australia Tax Treaty provides, viz: "(3) Subject to the provisions of paragraph 1, income from the alienation of capital assets of an enterprise as one of the Contracting States or available to a resident of one of the Contracting States for the purpose of performing professional services or other independent activities shall be taxable only in that Contracting State, but, where those assets form part of the business property of a permanent establishment or fixed base situated in the other Contracting States, such income may be, taxed in that other State." Under the foregoing provisions of the Tax Treaty, income derived from the alienation of capital assets of an Australian enterprise, i. e., the shares of stocks of CIG in CIGI is taxable only in Australia. Such being the case, your opinion to the effect that the aforementioned exchange is also exempt from Philippine income tax and that capital gains from the sale by CIG of its shares of stock in H. Co. are also exempt from Philippine income tax under the above-quoted provision of the RP-Australian Tax Treaty, is likewise confirmed. Furthermore, the certificates of stocks to be issued by H. Co. are, in all probability, original issues, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. Finally, under Section 248(d) in relation to Section 173 of the Tax Code as amended by Executive Order No. 273, in case of failure to affix the proper documentary stamp to a document or instrument, there shall, for every violation be imposed, in addition to the amount of documentary stamp tax required to be paid an amount equivalent to twenty-five (25%) percent of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. 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. cdt Very truly yours, (SGD.) JOSE U. ONG Commissioner