Corporate Development Tax of Closely-Held Corporation

December 3, 1981 BIR RULING NO. 250-81 24 (e) 109-81 250-81 Messrs. Sycip, Gorres Velayo & Co. P.O. Box 589, Manila Attention: Mr . M . Gutierrez Gentlemen : This refers to your letter dated August 28, 1981, requesting confirmation that in applying the attribution rules for purposes of determining whether a corporation is closely-held or not, the complete chain of ownership should be traced until it reaches the individual stockholders who are the ultimate beneficial and interest owners, as illustrated under the following hypothetical facts and circumstances: "U.S. corporation A wholly owns domestic corporation X. U.S. corporation A, in turn, is wholly owned by U.S. corporation B, which in turn is wholly owned by U.S. corporation C. U.S. corporation C is a publicly-held corporation, i.e., no five individual persons owns at least 50% of the total combined voting power of all classes of stock of U.S. corporation C." In reply, I have the honor to inform you, that this Office has already ruled that in the case of a resident foreign corporation which is wholly owned by a single corporation, the former is not a closely held corporation insofar as the 10% corporate development tax is concerned, since it is deemed to be owned indirectly by the shareholders of the mother company. (BIR Ruling No. 24-a-000-00-55-81 dated March 23, 1981). In further support of the said ruling, this Office cited Section 2(c) of Revenue Regulations No. 7-81 dated March 16, 1981 which provides: cdt " Stock ownership by a person, other than an individual . In determining whether a person, other than an individual, such as a juridical person, owns a share of stock in a corporation directly or indirectly, the rule of attribution of stock ownership prescribed by paragraph (a) of Section 66 shall be applied. Thus, in cases of stock not owned by individuals, stock owned directly or indirectly by or for a corporation, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries. Under this rule, a subsidiary of a local and foreign corporation shall not be considered as owned by a parent corporation but by the shareholders of the said parent corporation ". Under the above-quoted underlined portion of the regulations, it would seem that for purposes of the 10% corporate development tax, it is not warranted to go beyond the shareholders of the parent corporation in a case where the said shareholder is, likewise, a corporation. However, under Section 224 of Revenue Regulations No. 2, implementing Section 66(a) of the Tax Code, which has been applied in the regulations implementing the 10% corporate development tax, it is legally possible to go beyond the said shareholders of the parent corporation. Thus, in the case of multi-tiered corporation , the attribution rule must be allowed to run continuously along the chain of ownership until it finally reaches the individual stockholders. Hence, based on your illustration, for purposes of determining liability for the 10% corporate development tax of multi-tiered corporations, the stock ownership of domestic corporation X should be traced from U.S. corporation A to U.S. corporation B and finally to U.S. corporation C which is composed of individual stockholders and who may be regarded as the ultimate and beneficial owners of domestic corporation X. cdtech Very truly yours, RUBEN B. ANCHETA Acting Commissioner