Exemption from Income Tax — Debenture Bonds

October 22, 1981 BIR RULING NO. 203-81 035-c 000-00-203-81 Skyland Realty Development Corporation HMC Bldg., South Superhighway Corner Rockefeller Street Makati, Metro Manila Attention: Mr . Michael L . Recto President Gentlemen : This refers to your letter dated May 5, 1981 requesting a ruling as to whether the gain realized by the stockholders of corporation in the exchange of their shares of stock with debenture bonds are exempt from income tax. It is represented that you are presently negotiating to merge your company with a bank; and that the bank's controlling stockholders offered to issue a 5 year debenture bonds to your stockholders in exchange for their shares of stock instead of preferred shares because it will dilute the shareholdings of the bank's stockholders. In reply, I have the honor to inform you that pursuant to Section 35(c) of the Tax Code of 1977, as amended by Presidential Decree No. 1738 and as implemented by Revenue Regulation 11-80, the gain realized from exchanges of property, real or personal, for new issues of capital stocks in banks or non bank financial intermediaries or a corporation organized primarily for the purpose of owning equity in banks if, as a result of such exchange, the paid-in capital of such institution is increased, shall be exempt from income tax. Considering that in the aforementioned transaction, the bank shall issue debenture bonds and not shares of stocks, and since a debenture bond is merely a simple acknowledgment of a debt in the nature of a bond, the gains realized from the exchange are subject to income tax. cdtech Very truly yours, ROMULO M. VILLA Acting Commissioner