Stockholder's Contribution Consisting of the Condoned Portion is Not Subject to Income Tax
BIR Ruling No. 193-87 • Bureau of Internal Revenue (BIR) Issuances • Rulings (Numbered) • Jul 7, 1987
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July 7, 1987 BIR RULING NO. 193-87 28 162-87 193-87 S i r : This refers to your letter dated June 23, 1987 stating that Nobel Philippines, Inc. (NPI), a domestic corporation organized and existing under Philippine laws, was granted a buyer's credit by two English banks for U.S. Dollar 20.7 million, that the credit was guaranteed by Export Credits Guarantee Department of Great Britain; that one of the counter guarantors of the credit is its principal stockholder, Nitro Nobel AB of Sweden (NNAB), that the original repayment of the loan had been restructured twice by the corresponding supplemental agreements that essentially extended the period of repayment and increased the interest rates; that the adjustments made to the loan agreement were not sufficient to provide NPI with the necessary relief from its financial difficulties; that said NNAB (principal stockholder) plans to prepay and assume a specific portion of the original loan; and thereafter condone a portion or all of the assumed loan; that the condoned portion of the assumed loan amount will take the form of capital distribution without issuing additional shares; that the book of NPI will show the corresponding reduction of liability and an increase in capital contribution without increasing the number of shares issued. You now request a ruling as to the tax consequence of the amount of loan condoned by NNAB (principal stockholder) which condoned portion represents additional capital contribution in the form of donated surplus without the necessity of NPI issuing additional shares of stocks corresponding to said condoned portion of the loan. cdta In reply, please be informed that since the condoned portion represents additional capital contribution, it is a capital investment which is not included within the purview of the term "taxable income" as defined in Section 28 in relation to Section 29 of the Tax Code; hence, the stockholder's contribution consisting of the condoned portion is not subject to income tax. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner
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