Phimco Shares

April 28, 1993 BIR RULING NO. 154-93 PHIMCO SHARES 25 (b) (5) (B) 010-89 154-93 King, Capuchino, Tan and Associates Quezon Avenue cor. Cordillera Street Quezon City Attention: Atty . Lincoln L . Tan, Jr . This refers to your letter dated January 28, 1993 stating that on August 9, 1989, the packaging division of Phimco Industries, Inc. (Phimco) was spun-off into a wholly-owned corporation named Akerlund & Raising (Phils.), Inc (A & R Phils.); that substantially all of the assets of the packaging division were transferred to A & R Phils. effective September 1, 1989 pursuant to a Deed of Transfer executed by Phimco; that the assets consisted of property and equipment with an appraised value of P145,670,500.00, inclusive of appraisal increment of approximately P60,000,000.00 and inventories and accounts receivable valued at P179,485,012.00 or a total assets of P325,155,512.00, in exchange for 1,456,705 A & R shares valued at P145,670,500.00 based on P100.00 par value per share and promissory note payable to Phimco or P179,435,012.00 which represents the liabilities pertaining to the inventories acquired on credit from various suppliers; that a year later or on August 22, 1990, Phimco declared and distributed as property, dividend the entire 1,456,705 A & R shares in favor of its existing stockholders, proportionate to their respective shareholdings, as follows: No. of Shares Percent Swedish Match AB (SMAB) 1,402,261 96.26% Local Minority Stockholders 54,444 3.74% Total 1,456,705 100.00% ======= ======= that as a consequence of the dividend distribution of the 1,456,705 A & R shares, Phimco withheld and paid the amount of P21,033,915.00 under confirmation Receipt No. B19713463 on September 5, 1990 representing the 15% dividend withholding tax pursuant to Section 25(b) (5) (B) of the Tax Code and Article 10 of the RP-Sweden Tax Treaty; that Phimco also paid the amount of P11,873,746.00 as capital gains tax under Confirmation Receipt No. B19511512 for P10,322,342.00 and Tax Debit Certificate of P1,551,398.00 which tax payment was based on the appraisal increment of the property/equipment of approximately P60,000,000.00; and that at the time of the dividend distribution of the 1,456,705 A & R shares, which were unlisted shares, Phimco had an unrestricted retained earnings of P426,146,060.00 as of December 31, 1989 as shown by the Financial Statements of Phimco for the year ending December 31, 1989. In connection therewith, you now request confirmation of your opinion to the effect that Phimco is not subject to income tax or capital gains tax on the distribution of its entire 1,456,705 A & R shares by way of property dividend in favor of its stockholders. In reply thereto, I have the honor to inform you that dividends comprise any distribution whether in cash or other property in the ordinary course of business even though extraordinary in amount, made by a domestic or resident foreign corporation to the stockholders out of its earnings or profits (Sec. 250, Income Tax Regulations ) Phimco had an unrestricted retained earnings of P426,146,060.00 as shown by its Financial Statements for the year ending December 31, 1989, when it declared and distributed its 1,456,705 A & R shares valued at P145,610,500.00 as property dividend to its stockholders. In BIR Ruling No. 25(b) (5) (B) 324-87-010-89 dated February 1, 1989, this Office held that a company is not subject to income tax or capital gains tax when it declares and transfers its shares in another company as property dividend in favor of its stockholders as in this case. A company realized no taxable income in declaring a dividend since the distribution of dividends among the stockholders is not a sale nor were assets used to discharge an indebtedness (See General Utilities and Operating Co. v. Halvering 296 U.S. 200-207). Such being the case, your opinion that Phimco is not subject to income tax and/or capital gains tax when it distributed its 1,456,703 A & R shares as property dividends to its stockholders is hereby confirmed. VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue