Tax Consequence of a Sale of Shares of Stocks

November 23, 1990 BIR RULING NO. 219-90 24 029-89 219-90 S i r : This refers to your letter dated June 4, 1990 stating that "A" Company organized a wholly-owned subsidiary, "X" Company, with a P1 Million initial cash investment for one (1) million shares of stock at the par value of P1.00 per share; that subsequently, "A" Company conveyed some of its real property to "X" Company at book value in exchange for shares of stock under the tax-free provision of Section 34 (c)(2) of the National Internal Revenue Code, as amended; that as a result of the exchange, "A" Company received two (2) million shares of stock of "X" Company equivalent to the book value of the real property so conveyed; that to fund the operations of "X" Company, "A" Company further invested the amount of P1 Million in cash in the capital stock of "X" Company for which another one (1) million shares were issued by "X" Company to "A" Company; and that thereafter, in view of the promising business of "X" Company, the stockholders decided to list the shares of stock of "X" Company, thus becoming a publicly listed company. cdtech In connection therewith, you now request a ruling on the following queries: "1. If "A" Company sells its shares in "X" Company acquired in the manner indicated above, through the stock exchanges, what would be applicable tax rate, of 1% of the gross selling price or 10% - 20% based on the capital gains? "2. Assuming that "A" Company pays the of 1% tax on the sale of the shares through the stock exchanges, would the Company be relieved of any liability for further capital gains tax? In other words would the of 1% be a final tax? "3. Assuming further that "X" Company declares a stock dividend to "A" Company and which the latter subsequently sells likewise through the stock exchanges, would the tax liability of "A" Company on the sale of the shares representing the stock dividend be the same as in the above query?" In reply thereto, I have the honor the inform you as follows: (1) If "A" Company sells its shares in "X" Company acquired in the manner indicated above, through the stock exchanges, "A" Company shall be subject to a tax of of 1% based on the gross selling price of the shares of stock pursuant to Section 24 (e)(2)(B) of the Tax Code, as amended; (2) Pursuant to Section 50 (a) of the Tax Code, the capital gains tax of of 1% on the aforesaid sale of shares of stock based on the gross selling price of the shares of stock under Section 24 (e)(2)(B) of the Tax Code is a final withholding tax which shall be paid in the same manner and subject to the same conditions as provided in Section 51 of the same Code; and (3) If "X" Company declares a stock dividend to "A" Company and which the latter subsequently sells through the stock exchanges, "A" Company will be subject to a tax of of 1% based on the gross selling price of the shares of stock pursuant to Section 24 (e)(2)(B) of the Tax Code, as amended. casia Very truly yours, (SGD.) JOSE U. ONG Commissioner