Incentive Trust Fund that Filcredit Finance and Capital Development Corporation Set Up for Its Officers and Employees Exempt from Income Tax as an Employees Trust

December 11, 1997 BIR RULING NO. 134-97 53 (b) 000-00 134-97 Filcredit Finance and Capital Development Corporation 11th Floor, PDCP Bank Center corner Herrera and Alfaro Streets Salcedo Village, Makati City Attention: Mr . Ernesto C . Enriquez Vice President and Comptroller Gentlemen : This refers to your letter dated March 14, 1997 requesting, in effect, for a ruling confirming your opinion that the Incentive Trust Fund that Filcredit Finance and Capital Development Corporation (Filcredit) set up for its officers and employees is exempt from income tax as an employees trust under Section 53(b) of the Tax Code. It is represented that in December, 1990, Filcredit and the Board of Trustees of the Filcredit Officers and Employees Incentive Trust Fund (Board of Trustees) entered into a Trust Agreement under which Filcredit set up or established an Incentive Trust Fund for Filcredit officers and employees to be administered by the Board of Trustees; that the Trust Fund is intended as an incentive to promote employees' interest in the Company's success as well as attract and retain employees of outstanding competence; that the plan contemplates both short and long term profit sharing; that each participant of the Trust Fund periodically receives cash distributions during active employment and a lump sum gratuity; that as regards funding, Filcredit initially contributed the amount of P1,650,000.00 upon the plan's effectivity; that thereafter, over a period of 19 years, Filcredit would contribute an additional amount of P31,350,000.00 to the Trust Fund; that these amounts are used to subscribe to shares of stock of Filcredit to be held in trust for the benefit of the officers and employees participating in the trust; that all contributions made to the Trust Fund are irrevocable; that under the plan, each participant ( i.e. an employee qualified by the trustees) is awarded trust units corresponding to as many shares of stock in Filcredit; that a special ledger account is set up and maintained for each participant to reflect the number of units awarded to him and the book value or equal number of shares at the time of the award; that the Trust Fund is divided in two: Incentive Fund A and Incentive Fund B; that under Incentive Fund A, at the end of every other fiscal year (or every 2 years) a cash payment is distributed to each participant equivalent to the excess of the net book value per unit; that under Incentive Fund B, a similar distribution is made every 5 years based on the same valuation; that in the event of termination (death, retirement, resignation, discharge or otherwise) occurs, the terminated participant receives, in cash lump sum, the excess of the net book value per unit as of the end of the fiscal year of termination over the original or previous net book value per unit; that upon termination of the trust agreement, only participants who are at such time employees of Filcredit or their designated beneficiaries shall be entitled to the benefits of the plan; that the participant or beneficiary shall receive the entire amount (i.e. the balance, including both income and corpus) credited to the participant's account as of the date of the termination of the agreement in cash lump sum; that based on the above-described features, you are of the opinion that the Incentive Trust Fund that Filcredit set up for its officers and employees is an employee's trust which forms part of a profit-sharing plan of an employer for the benefit of some or all of the employees, and is therefore exempt from income tax pursuant to Section 53(b) of the Tax Code, as amended. In reply, please be informed that under Section 53(b) of the Tax Code, as amended, the tax imposed by Title II of the same Code shall not apply to employees' trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the Trust in accordance with such plan; and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees, provided, that any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee. In this connection, General Circular No. V-248 implementing R.A. No. 1983 provides that Employees' Trust is exempt from income tax if it satisfies the following conditions: "(1) The employees trust must be part of a pension, stock bonus, or profit-sharing plan of an employer for the benefit of some or all of his employees; "(2) Contributions are made to the trust by such employer, employee or both; "(3) Such contributions are made for the purpose of distributing to such employees both the earning and principal of the fund accumulated by the Trust; "(4) The fund is accumulated by the trust in accordance with the plan of which the trust is part; and "(5) The trust instrument makes it impossible (in the taxable year and at any time thereafter prior to the satisfaction of all liabilities to employees covered by the Trust) for any trust corpus or income to be used for, or diverted to purposes other than for the exclusive benefit of such employees." Moreover, a profit-sharing plan has been defined as a plan established and maintained by an employer to provide for the participation in the profits by the employees or their beneficiaries. Such being the case, and since the Filcredit Officers and Employees Incentive Trust Fund satisfies all the conditions set forth in General Circular No. V-248 implementing R.A. No. 1983 and the conditions set forth under Section 53(b) of the Tax Code, as amended, your opinion that the same is an employees' trust which forms part of a profit-sharing plan of an employer for the benefit of some or all of the employees within the contemplation of Section 53(b) of the Tax Code, as amended and therefore exempt from income tax on any income received by it as such is hereby confirmed. 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. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue