Claim as Deduction by Surviving Corporation of the NOLCO Balance of Absorbed Corporations

August 31, 1999 BIR RULING NO. 137-99 34 (D) (3); 27 (E) (3), NIRC Sec. 80, Corp. Code-000-00-137-99 Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles ATTORNEYS AT LAW 30th Floor, Citibank Tower, Citibank Plaza 8741 Paseo de Roxas Makati City Attention: Attys . Priscilla B . Valer and Jason L . Fernandez Gentlemen : This refers to your letter dated July 16, 1999 requesting on behalf of your client, Sanofi Winthrop, Inc . (hereafter " SWI "), for a ruling that the net operating loss carry over ("NOLCO") balance and the excess minimum corporate income tax (MCIT) of an absorbed corporation in a statutory merger will, on the effective date of the merger, be transferred to and vested in the surviving corporation; and that, consequently, (i) the aggregate NOLCO balances of the absorbed and the surviving corporations may be claimed by the surviving corporation as a deduction from gross income under Section 34(D)(3) of the 1997 Tax Code, and (ii) the excess MCIT of the absorbed corporation shall be carried forward and credited against the normal income tax due of the surviving corporation for the three immediately succeeding taxable years pursuant to Section 27(E)(3) of the same Code. prcd It is represented that SWI, Sanofi Philippines, Inc. (" Sanofi-Philippines ") and Synthelabo Phils., Inc. (" Synthelabo-Philippines ") are all domestic corporations duly organized and existing under the laws of the Philippines to engage in the manufacture and distribution of personal care, health care and consumer products; that these corporations adopt a calendar year-end and do not enjoy any tax exemption; that SWI is owned 49.9% by SANOFI ("Sanofi France") and 50.1% by Sanofi Philippines; that Sanofi Philippines is owned 100% by Sanofi France. Synthelabo Philippines is 100% owned by SYNTHELABO ("Synthelabo France"). It is also represented that on May 18, 1999, Sanofi-France, a French company which is the parent company of SWI and Sanofi-Philippines, and Synthelabo-France, another French company which is the parent company of Synthelabo-Philippines, merged into the absorbing company: Sanofi-Synthelabo, in accordance with the article 372-1 of the French Law no. 66-537 dated July 24, 1966; that as a result of the said merger, SWI, Sanofi and Synthelabo are now wholly-owned by a common parent company Sanofi-Synthelabo, a corporation organized and existing under the laws of France; that since the three companies are owned by a common parent company and are engaged in the same line of business, Sanofi-Philippines and Synthelabo-Philippines will be merged into SWI pursuant to and in accordance with Title IX of the Corporation Code of the Philippines, with SWI as the surviving corporation and Sanofi-Philippines and Synthelabo-Philippines as the absorbed corporations; that the statutory merger would allow the integration of administrative functions thereby eliminating the duplication of functions, result in greater efficiency and economy in the management of their operations, make possible the more productive use of their properties, and achieve a favorable financing and credit facilities; and that pursuant to a proposed Plan of Merger, Sanofi-Philippines and Synthelabo-Philippines will transfer all its assets and liabilities to SWI in exchange for new shares of the capital stock of SWI which shall be distributed to the stockholder of Sanofi and Synthelabo. Documents submitted show that for the taxable year ended December 31, 1998, SWI, Sanofi-Philippines and Synthelabo-Philippines incurred net operating losses and had excess MCIT as follows: Net operating loss MCIT SWI P25,443,537.00 P7,418,208.00 Sanofi-Philippines P12,276,579.00 P83,044.00 Synthelabo-Philippines P9,262,915.00 P2,432,821.00 Totals P46,983,031.00 P9,934,073.00 ============ =========== In reply, please be informed that Section 80 of the Corporation Code enumerates the legal effects of a statutory merger as follows: "SEC. 80. Effects of merger or consolidation . The merger or consolidation shall have the following effects: "1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; "2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; "3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; "4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation." By operation of Section 80 of the Corporation Code, SWI shall possess all the rights, privileges, immunities and franchises of Sanofi-Philippines and Synthelabo-Philippines and all property, real or personal, and all and every other interest of, or belonging to, or due to Sanofi-Philippines and Synthelabo-Philippines shall be deemed carried on to and vested in SWI without further act or deed. In BIR Ruling No. 112-96 dated October 25, 1996, this office ruled that: "In a merger, the surviving corporation (Chembank) succeeds to the rights and liabilities of the absorbed corporation (CMB), and merely carries on the identity of the latter. (Cashman v. Brohee, 27 N.E. 560). Consequently, no gain was realized by the surviving bank Chembank or its Philippine branch. (BIR Ruling No. 595-88 dated December 23, 1988)." Since the NOLCO balance and excess MCIT of the absorbed corporations are among the rights, privileges, property and/or interest of the absorbed corporations, the NOLCO balance of Sanofi-Philippines and Synthelabo-Philippines amounting to P12,276,579.00 and P9,262,915.00, respectively, and the excess MCIT of Sanofi-Philippines and Synthelabo-Philippines of 83,044.00 and 2,432,821.00, respectively, shall be transferred to and vested in SWI, as the surviving corporation on the effective date of the merger. Section 34(D)(3) of the Tax Code, as amended by the Comprehensive Tax Reform Act, provides: "(3) Net Operating Loss Carry-over . The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss; Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as deduction under this Subsection: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that "(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or "(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. "For purposes of this Subsection, the term 'net operating loss' shall mean the express of allowable deduction over gross income of the business in a taxable year; "xxx xxx xxx" Pursuant to the above-quoted Section 34(D)(3) of the Tax Code and considering that the merger will be undertaken for a bonafide business purpose and not for the purpose of escaping the burden of taxation and there is no effective change in ownership, the surviving corporation can claim as NOLCO deduction the NOLCO balance of the absorbed corporation/s, which shall be transferred and vested in the surviving corporation by operation of law pursuant to statutory merger. Since SWI, Sanofi-Philippines will continue to be owned by one single parent company, i.e., Sanofi-France and Synthelabo-Philippines by Synthelabo France, which as of May 18, 1998, have merged into a single parent company, i.e., Sanofi-Synthelabo of France, as the absorbing corporation, and likewise, Sanofi-Philippines and Synthelabo-Philippines will also be merged into SWI pursuant to and in accordance with Title IX of the Corporation Code, SWI can claim as NOLCO deduction for the next three consecutive years the NOLCO balance of the absorbed corporations, i.e., Sanofi-Philippines and Synthelabo-Philippines as of December 31, 1998. Such NOLCO balance is transferred to and vested in SWI by operation of law pursuant to the statutory merger and SWI's own NOLCO balance as of December 31, 1998. Likewise, since the excess MCIT will form part of the assets transferred to and vested in SWI on the effective date of the merger, SWI may carry forward and credit the excess MCIT of Sanofi-Philippines and Synthelabo-Philippines against its normal income tax liability for three immediately succeeding taxable years pursuant to Section 27(E)(2) of the 1997 Tax Code, which provides: "(2) Carry Forward of Excess Minimum Tax . Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. Accordingly, the excess minimum corporate income tax (MCIT) of an absorbed corporation in a statutory merger will, on the effective date of the merger, be transferred to and vested in SWI, as the surviving corporation. Also, the aggregate NOLCO balances of the absorbed corporations and the surviving corporation may be claimed by the surviving corporation SWI as a deduction from gross income under Section 34(D)(3) of the 1997 Tax Code. Finally, the excess MCIT of the absorbed corporation shall be carried forward and credited against the normal income tax due of the SWI, as the surviving corporation, for the three immediately succeeding taxable years pursuant to Section 27(E)(3) of the same Code. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue