Tax Consequence of Transfer of Stockholdings in Exchange for Issued and Outstanding Shares

September 29, 1994 BIR RULING NO. 149-94 34 (c) (2) (6) (c) 000-00 149-94 Makati Shangri-La Hotel & Resort, Inc. 10th Floor, Salustiano D. Ty Tower 104 Paseo de Roxas cor. Perea Streets Makati, Metro Manila Attention: Ms . Maria Theresa M . Cortes Corporate Secretary Gentlemen : This refers to your letter dated September 19, 1994 requesting confirmation of your opinion that no gain or loss shall be recognized on the transfer by a group of stockholders of Makati Shangri-La Hotel and Resort, Inc. (Makati Shangri-La) namely: Kerry Holdings Limited, (formerly known and existing as "Sligo Holdings Limited"), Kuok Traders (Hongkong) Limited, Shangri-La Holdings Limited, Pecanola Company Limited and Jellico Limited (collectively, the "Group") of their stockholdings in Makati Shangri-La in exchange for the entire issued and outstanding shares of CUMPASS under Section 34, paragraphs (c)(2) and (6)(c) of the Tax Code, as amended. cdti It is represented that the Group are corporations organized and existing under the laws of Hongkong, together with its four (4) nominee directors, own a substantial portion of Makati Shangri-la's issued and outstanding common and preferred capital stock; that in terms of percentages, the ownership of the capital stock of Makati Shangri-La is as follows: Common Preferred 1. Kerry Holdings Limited 12.45% 32.8% 2. Kuok Traders (Hongkong) Limited 2.19% 10.4% 3. Shangri-La Holdings Limited 8.00% 8.0% 4. Pecanola Company Limited 5.58% - o -% 5. Jellico Limited 22.25% - o -% Sub-Total: 50.46% 51.2% 6. Others 49.54% 48.8% Total : 100.00% 100.00% ======= ======= that in view of the impending turn-over of Hongkong to the People's Republic of China in 1997, the Group is now rationalizing its equity investments in various countries, including those in the Philippines, with an end in view of consolidating these investments in non-Hongkong based companies; that as part of this process, the Group is considering the transfer of the aforesaid shares in Makati Shangri-La to CUMPASS HOLDINGS LIMITED (CUMPASS), a holding company duly organized and existing under the laws of the British Virgin Islands with registered office situated at P.O. Box 71, Craigmuir Chambers, Road Town, Tortola, British Virgin Islands; that it is envisioned that in exchange for shares of stock of CUMPASS, the Group shall transfer its common and preferred shares to CUMPASS as follows: Makati Shangri-La Shares to be transferred to CUMPASS Name of Investor/ No. of Shares Aggregate Par Value Shareholder (in Pesos) 1. Kerry Holdings Limited 1,804,256 P 180,425,600.00 2. Kuok Traders (Hongkong) Limited 408,631 40,863,100.00 3. Shangri-La Holdings Limited 897,560 89,756,000.00 4. Pecanola Company Limited 514,599 51,455,900.00 5. Jellico Limited 2,051,637 205,163,700.00 that as a result of the exchange, the Group will acquire the entire issued and outstanding shares of CUMPASS, and the ownership structure in terms of percentage in CUMPASS shall be as follows: CUMPASS shares to be received by transferors: 1. Kerry Holdings Limited 31.78 2. Kuok Traders (Hongkong) Limited 7.20 3. Shangri-La Holdings Limited 15.81 4. Pecanola Company Limited 9.07 5. Jellico Limited 36.14 TOTAL : 100.00 ====== that in support of your request, you submitted to this office photocopies of the following documents: (a) Deed of Transfer/Assignment/Exchange between the Group and CUMPASS; (b) Memorandum & Articles of Association of CUMPASS; (c) Copies of Makati Shangri-La's share certificates to be transferred; (d) Certification as to the original or historical cost of acquisition of the shares; (e) Certification or the book value of the shares involved in the exchange; (f) Certification by the corporate secretary of CUMPASS of its authorized capitalization and the par value of the shares of stock; and percentage of ownership of the shares of stock of the individual members of the Group in CUMPASS as a result of the transaction. cdtech In reply thereto, please be informed that pursuant to Section 34, paragraphs (c)(2) and (6)(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 a 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 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, whether for property or for services by the transferor or transferors. 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. Accordingly, no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by the Group namely: Kerry Holding Limited, Kuok Traders (Hongkong) Limited, Shangri-La Holdings Limited, Pecanola Company Limited and Jellico Limited of their shares of stock in Makati Shangri-La in exchange for shares of stock of the transferee corporation, CUMPASS, considering that as a consequence of the said exchange, the transferors will gain control of the transferee corporation by owning more than 51% of its total voting stock. It should be emphasized, however, that Section 34(c)(2) and (6)(c) of the Tax Code merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties or stocks is considered. Thus, if the transferors later sell or exchange the shares of stock acquired by them in the exchange, they shall be subject to income tax on gains 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 property exchanged therefor; and that the cost basis to the transferee of the property exchanged for stocks shall be the same as it would be in the hands of the transferors (Section 34(c)(5)(a) and (b) of the Tax Code, as amended by Presidential Decree No. 1773). In this connection, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gains provided for in Section 34(c)(2) and (6)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned: a) The transferors must file with their income tax return for the taxable year in which the exchange transaction was consummated, a complete statement of all facts pertinent to the exchange, including: 1. A description of the properties transferred, or of their interest in such properties together with a statement of the original acquisition cost/adjusted cost basis or other basis thereof at the time of the transfer; 2. The kind of stocks received and preferences, if any; 3. The number of shares of each class received, and 4. The fair market value per share of each class at the date of the exchange. b) On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated the following: 1. A complete description of all properties received from the transferors; 2. A statement of the original acquisition cost or other basis of the properties in the hands of the transferor and the adjusted cost thereof at the time of the transfer; and 3. Information with respect to the capital stock of the corporation including: a. The total issued and outstanding capital stock immediately prior to and immediately after the exchange with a complete description of each class of stock; b. The classes of stocks and number of shares issued to the transferors in the exchange; and c. The fair market value as of the date of the exchange of the capital stock issued to the transferors. In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayers participating in the exchange, showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of stocks/properties received in the exchange. The parties shall also cause to be annotated on the Certificate of Stocks, the date the deed of exchange was executed, the original or historical cost of acquisition of the shares of stock involved, and the fact that no gain or loss was recognized as a result of such exchange. 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue