No Gain or Loss Shall be Recognized on the Transfer by SMC of Some of Its Assets in Exchange for Shares of Stock of ICP

October 28, 1991 BIR RULING NO. 217-91 34 (c) (2) (c) 100-91 217-91 Gentlemen : This refers to your letter dated September 16, 1991 stating that San Miguel Corporation (SMC) is a domestic corporation engaged in the business of manufacturing beer and food products, while Instafood Corporation of the Philippines (ICP) is likewise a domestic corporation engaged in the business of processing, manufacturing and marketing of prepared foods ready to eat products; that ICP has an authorized capital stock of P20,000,000.00 divided into 2,000,000 common shares, 500,070 have been fully subscribed and paid up; that it is a wholly-owned subsidiary of SMC; that SMC contemplates to transfer some of its assets consisting of real properties (land and building), machinery and equipment; and capital project in progress with an appraised value of P114,700,000.00 (cost in P89,300,000.00) to ICP solely in exchange for its shares of stock and that as a result of the exchange SMC will retain control of ICP by owning more than 51% of the total voting power of all classes of stock entitled to vote; that the assets of SMC will be exchanged at cost or market value for common shares of ICP; that pursuant to this exchange ICP will correspondingly increase its authorized capital stock to P500,000,000.00 in anticipation of the entry of SMC investment; that the purpose of the transfer of assets is to enable ICP to expand and modernize its operations, acquire and master new technologies, cope with labor force with different expertise and expectations and satisfy changing needs of its customers; that it is a response to the increasing consumer demand for high quality and value added products affordable to the mass base of the population; and that part of SMC's thrust and long term strategy is to react fast to competition, changing environment, shorter product life cycles and shifts in consumer preference. cdtech In connection therewith, you now request confirmation of your opinion as follows: "(1) No gain or loss shall be recognized by both SMC and ICP on the transfer of assets solely for shares, and shares for assets, respectively, pursuant to Sec. 34 (c) (2) of the Tax Code, considering that as a result of the transfer of the assets, SMC will continue to retain control of ICP; "(2) The transfer by SMC of its assets in exchange for ICP 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 ICP 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 ICP to be received in the exchange; "(5) The certificates of stocks to be issued by ICP are subject to documentary stamp tax, being original issues pursuant to Section 178 of the Tax Code." In reply thereto, I have the honor to inform you that pursuant to Section 34, paragraph (c) (2) (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 same transaction may be counted up to a maximum of five. Accordingly, no gain or loss shall be recognized both to the transferor and the transferee corporations on the transfer by SMC of some of its assets consisting of real properties (land and building), machinery, equipment and capital projects in progress in exchange for shares of stock of ICP considering that after the exchange of properties and as a result of the exchange, the transferor will retain control of the transferee corporation by owning more than 51% of the total voting power of all classes of stock entitled to vote. cdta It should be emphasized, however, that Section 34 (c) (2) (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 transferor later sells or exchanges the shares of stock acquired by it in the exchange, it 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 transferor of the properties exchanged therefor; and that the cost basis to the transferee of the properties exchanged for stocks shall be the same as it would be in the hands of the transferor. (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) (c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned: a. The transferor 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, 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 the 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 stocks/properties received in the exchange. The parties shall also cause to be annotated on the Transfer Certificate 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 stock involved, and the fact that no gain or loss was recognized as a result of such exchange. 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 of 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 a parcel of land, is exchanged with stocks in a corporation as in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the Deed of Assignment executed to effect the aforesaid transfer (BIR Ruling No. 245-00-000-00-109-82 dated April 06, 1982). The value shall be the fair market value which shall not be less than the par value of the stocks. Under Section 248 (d) in relation to Section 173 of the Tax Code as amended by Executive Order No. 273, in case of failure to affix the proper documentary stamps to a document or instrument, there shall, for every violation, be imposed, in addition to the amount of documentary stamp tax required to be paid, an amount equivalent to twenty-five percent (25%) of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Furthermore, your opinion to the effect, viz: (1) That the transfer by SMC of its assets in exchange for ICP shares will not be considered as a transfer of property for insufficient consideration subject to gift tax since there is no intention to donate on the part of any of the parties and the transaction is effected solely for business reasons; and (2) That the assets may be transferred by SMC to ICP either at cost or market value without affecting the tax-free character of the transfer. are hereby confirmed. Finally, the certificate of stocks to be issued by ICP are, in all probability original issues, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. After payment of the corresponding documentary stamp tax, the real properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, ICP. 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, (SGD.) JOSE U. ONG Commissioner