No Gain or Loss Shall be Recognized on the Transfer of Substantially All of the Assets of the Transferor's Operating Division in Exchange for Shares of Stock of the Transferee Corporation

October 28, 1991 BIR RULING NO. 216-91 34 (c) (2) (c) 221-90 216-91 Gentlemen : This refers to your letters dated August 29 and September 17, 1991 stating that San Miguel Corporation (SMC) a domestic corporation engaged in the business of manufacturing beer and food products, contemplates to transfer substantially all of the assets of one of its operating divisions, Feeds and Livestock Division (FLD), to a new corporation tentatively named FL Corporation (FLC) solely in exchange for shares of stock of the latter; that FLD is engaged in the business of manufacture and sale of animal and poultry feeds (Non-VAT Reg. No. 4B1-31-000676); that the assets to be transferred by SMC will consist or fixed assets (among others, machinery and equipment, transportation equipment, land and buildings) and non-fixed assets (among others, inventories, accounts receivables, prepayments); that the assets to be transferred by SMC have outstanding liabilities which will be assumed by FLC; that the net assets of SMC will be exchanged at cost or market value for common shares of FLC; that the liabilities of SMC to be assumed by FLC shall not exceed the cost basis of SMC in the assets transferred; that considering the administrative difficulties such as obtaining consent from many creditors and suppliers, certain liabilities may initially be paid by SMC and FLC will subsequently reimburse the same amount to SMC; that after the said exchange, FLC will become a wholly-owned subsidiary of SMC; that the spin-off of FLD is part of SMC's vision and long term strategy to react fast to competition, changing environment, shorter product life cycles and shifts in consumer preference; that the thrust of SMC is to make its businesses more autonomous and self-sufficient so as to better acquire and master new technologies, cope with labor force with different expertise and expectations, and master and satisfy the changing needs of its customer and end-consumers; that as a subsidiary, FLC will gain better industry focus and flexibility, greater awareness of operating results and speedier, more responsive decision making; that all employees of FLD will be absorbed by FLC without loss of tenure and retaining their present pay and benefits, hence their original date of hire by SMC will be considered for purposes of determining their tenure; and that the accrued retirement benefits of said employees as determined by independent actuary will be transferred to a successor retirement trust fund to be set up by FLC as a BIR-qualified private benefit plan. cdtech In connection therewith, you now request confirmation of your following opinion, that: "1. No gain or loss shall be recognized by SMC on the transfer of its assets to FLC pursuant to Sec. 34 (c) (2) of the Tax Code, considering that as a result of the transfer of the assets, SMC will gain control of FLC through ownership of 100% voting stock of FLC; "2. The transfer by SMC of its assets in exchange for FLC shares will not be considered as a transfer of property for insufficient consideration subject to gift tax since there is no intention to donate and the transaction is effected solely for business reasons; "3. The assets may be transferred by SMC to FLC either at cost or market value without affecting the tax-free character of the transfer; "4. Documentary stamp tax is due on the transfer of real properties by SMC which shall be based on the par value of the shares of FLC to be received in the exchange; "5. The certificates of stocks to be issued by FLC are subject to documentary stamp tax, being original issues, pursuant to Section 178 of the Tax Code; "6. The sale of animal and poultry feeds by FLD is an activity exempt from value-added tax under Sec. 103 (c) of the Tax Code. Hence, the transfer or spin-off of its tangible assets whether capital goods, stock in trade, supplies and materials solely in exchange for shares of the new corporation, FLC is likewise exempt from the value-added tax; "7. The accrued retirement benefits of the employees of FLD may be carried over or transferred without income tax consequences to SMC and the employees of FLD to the retirement trust fund to be set up by FLC as a BIR-qualified private benefit plan. In reply thereto, please be informed that pursuant to Section 34 (c) (2) (c) of the Tax Code as amended by Republic Act No. 4522 and Presidential Decree 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., subscribed whether for property or for services by the transferors. In determining the 51% stock ownership, only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five. Accordingly, your opinion that no gain or loss shall be recognized both to the transferor corporation and the transferee corporation on the proposed transfer by SMC of substantially all of the assets of one of its operating divisions, Feeds and Livestock Division in exchange for shares of stock of the transferee corporation, FLC, considering that as a result of said proposed exchange, SMC will gain control of FLC, the transferee corporation, is hereby confirmed. It should be noted, however, that Section 34 (c) (2) (c) of the Tax Code merely defers recognition of gain or loss from such transaction, for in determining the gain or loss from subsequent transaction of the fixed and non-fixed assets or of the stocks involved in the exchange, the original or historical cost of the properties or the stocks is considered. Thus, if the transferor will later sell or exchange the shares of stock acquired by it in the exchange, the same shall be subject to income tax on the gains derived from such sale or exchange, taking into consideration that the cost basis of the shares of stocks shall be the same as the original acquisition cost or adjusted cost basis to the transferor 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 transferor [Section 34 (c) (5) (a) and (b), Tax Code, as amended by Presidential Decree No. 1773]. In connection therewith, 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) (c) of the Tax Code, as amended they should comply with the requirements hereunder mentioned: (a) The transferor-corporation must file with its income tax return for the taxable year in which the exchange was consummated a complete statement of all facts pertinent to the exchange, including: 1. A description of the properties transferred, or of its interest in such properties, together with a statement of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the transfer; 2. The kind of stock 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 transferor; 2. A statement of the original acquisition cost or other basis of the properties in the hands of the transferor and the adjusted cost basis 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 transferor in the exchange; and c) The fair market value as of the date of the exchange of the capital stock issued to the transferor. 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 stock/properties received in the exchange. The parties shall also cause to be annotated on the Transfer Certificates of Titles and at the back of the Certificate of Stocks, the date the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of stock involved; and the fact that no gain or loss was recognized as a result of such exchange. cdt Moreover, pursuant to Section 196 of the Tax Code, as amended, a conveyance or deed whereby land is assigned or transferred to the purchaser is subject to documentary stamp tax based on the consideration or value received or contracted to be paid for such realty. A stock in a corporation is a valuable consideration for transfer of real property. (Section 177, Documentary Stamp Tax Regulations). Accordingly, if parcels of land are exchanged with stocks in a corporation, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the deed to be executed to effect the aforesaid proposed transfer (BIR Ruling No. 109-82 dated April 6, 1982). The value shall be the fair market value which shall not be less than the par value of the stocks. Furthermore, your opinion to the effect, viz: (1) That the transfer by SMC of its FLD assets in exchange for FLC shares will not be considered as a transfer of property for insufficient consideration subject to gift tax since there is no intention to donate and the transaction is effected solely for business reasons; and (2) That assets may be transferred by SMC to FLC either at cost or market value without affecting the tax-free character of the transfer. (3) That the sale of animal and poultry feeds by FLD is an activity exempt from value-added tax under Sec. 103 (c) of the Tax Code. Hence, the transfer or spin-off of its tangible assets whether capital goods, stock in trade, supplies and materials solely in exchange for shares of the new corporation, FLC is likewise exempt from the value-added tax; are hereby confirmed. The certificates of stocks to be issued by FLC are in all probability original issues which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. As regards your query on the tax consequence of the transfer of the accrued retirement benefits of employees of the Feeds and Livestock Division to the proposed FLC Retirement Plan, the same shall be adjudicated upon submission to this Office of the copies of the written program constituting the Retirement Plan of FLC employees and amended SMC/Feeds and Livestock Division Retirement Plan; updated Actuarial Valuation Report of both Plans duly certified to by an independent Consulting Actuary who must be Fellow of the Actuarial Society of the Philippines; BIR Form No. 1760 duly accomplished (for FLC); and Trust Agreement executed by and between FLC & Trustee/Trustees of the FLC Retirement Trust Fund. Finally, the exchange of real properties with shares of stock is not subject to VAT because neither real property nor securities, e.g., shares of stock, come within the purview of VAT-Taxable goods as defined in Section 2(p) of Revenue Regulations No. 5-87. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation the same could not be substantiated, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE U. ONG Commissioner