Property Dividends Exempt from Withholding, Capital Gains, & Doc. Stamp Taxes

June 28, 1993 BIR RULING NO. 277-93 PROPERTY DIVIDENDS EXEMPT FROM WITHHOLDING, CAPITAL GAINS, & DOC. STAMP TAXES 34 (c) (2) (c) 24 (e) (4) 276-91071-92 277-93 Universal Robina Corporation 110 E. Rodriguez Ave. Libis, Quezon City Attention: Mr . Emmanuel C . Rojas, Jr . This refers to your letter dated May 7, 1992 stating as follows: "1. Universal Robina Corporation (URC) and Litton Mills, Inc. (LMI) are domestic corporations duly organized and existing under and by virtue of the laws of the Philippines. Both URC and LMI are presently wholly-owned by a holding company, JG Summit Holdings, Inc. (JGSHI), also a domestic corporation duly organized and existing under the laws of the Philippines. LMI is engaged in the business of textile and garment manufacturing; casia "2. URC owns fixed assets which are operated under the business style of Robina Textile Mills (Robitex), consisting of land, land improvements, buildings, machinery and equipment, furniture and fixtures, and transportation equipment, including construction-in-progress and machinery and equipment-in-transit, with an aggregate net book value based on cost of P484,518,132 as of September 30, 1991; "3. URC will declare as property dividends the aforementioned assets to its stockholder, JGSHI; "4. At present, LMI has an authorized capital stock of P300,000,000 divided into 18,000,000 Class A shares and 12,000,000 Class B shares of the par value of P10.00 per share, of which 18,000,000 Class A shares worth P180,000,000 and 6,063,757 Class B shares worth P60,637,570, or a total of 24,063,757 Class A and Class B shares worth P240,637,570 are held by JGSHI; "5. For the purpose of consolidating the textile business operations under one company, LMI to gain efficiencies and competitiveness in the market, JGSHI proposes to exchange the aforementioned assets to LMI solely in exchange for LMI's shares of stock, as follows: No. of Shares Amount Class A 29,071,088 P290,710,880 Class B 19,380,725 193,807,250 48,451,813 P484,518,130 ========= =========== To generate the shares of stock to be issued in exchange for the properties and cash infusion, LMI will increase its authorized capital stock to P1,000,000,000 or an increase of P700,000,000 divided into 42,000,000 Class A shares worth P420,000,000 and P28,000,000 Class B shares worth P280,000,000. As a result of the above exchange, JGSHI will gain further control of LMI, as follows: No. of Shares Amount Class A 47,071,088 P470,710,880 Class B 25,444,482 254,444,820 72,515,570 P725,155,700 ========= ========== Shares of stock of LMI may eventually be transferred or disposed of depending on the conditions of the stock market." In connection therewith, you now request confirmation of your opinion as follows: "1. The property dividend consisting of the Robitex assets to be declared by URC, a domestic corporation, to JGSHI, another domestic corporation, is not subject to any withholding tax, and JGSHI, the recipient-corporation, is not subject to any income or capital gains tax arising from the receipt of these assets as property dividends, in accordance with Section 24(e) (4) of the National Internal Revenue Code, as amended by Executive Order No. 37, exempting dividends received by a domestic corporation from another domestic corporation from tax; "2. The property dividend shall be recorded in the books of both URC, the issuing corporation, and JGSHI, the recipient-corporation at book value, and URC, the issuing corporation, will not be subject to any income or capital gains tax on the excess of the fair market value over the book value of the assets declared as property dividends because there is no realized gain; "3. Upon the subsequent sale or other disposition of the assets received as property dividends by JGSHI, the basis of the assets shall also be their book value at the time of the dividend declaration; "4. No gain or loss shall be recognized both on the part of JGSHI, the transferor, and LMI, the transferee, on the transfer of the aforementioned assets solely in exchange for shares of stock of LMI, considering that after the exchange and as a result of said exchange, the transferor JGSHI will gain further control of LMI, the transferee-corporation, in accordance with Section 34(c) (2) of the National Internal Revenue Code, . . .; Since JGSHI, the transferor, will as a result of the transfer acquire more than 51% of the total subscribed voting stock of LMI, the transfer qualifies for non-recognition of gain or loss under . . . Section 34(c) (2) of the Tax Code; "5. The basis of the LMI shares of stock in the hands of JGSHI shall be the same as its basis in the properties exchanged by URC; "6. The basis of the JGSHI properties in the hands of LMI shall be the same as this would be in the hands of JGSHI; "7. The transfer of the properties by JGSHI in exchange for LMI 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 purely for business reasons; "8. The original issues of the certificates of stock by LMI will be subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended; "9. The transfer of title to the real properties is subject to the documentary stamp tax imposed by Section 196 of the Tax Code, as amended;" In reply, I have honor to inform you as follows: 1. Your opinion to the effect that the property dividend consisting of the Robitex assets to be declared by URC to JGSHI is not subject to tax pursuant to Section 24(e) (4) of the Tax Code, as amended, is hereby confirmed. Moreover, JGSHI, the recipient-corporation is not subject to any income or capital gains tax arising from its receipt of the assets as property dividends; 2. Your opinion that the property dividend shall be recorded in the books of both URC, the issuing corporation and JGSHI, the recipient corporation at book value, and URC, the issuing corporation, will not be subject to any income or capital gains tax on the excess of the fair market value over the book value of the assets declared as property dividends because there is no realized gain is likewise hereby confirmed; 3. Your opinion that upon the subsequent sale or other disposition of the assets received as property dividends by JGSHI, the basis of the assets, shall also be their book value at the time of the property dividend declaration is hereby confirmed (BIR Ruling No. 276-91 dated December 26, 1991); 4. 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 stocks 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 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 transfer by JGSHI of the aforementioned assets in exchange for shares of stock of the transferee corporation, LMI, considering that as a result of said exchange, JGSHI will gain further control on LMI, the transferee corporation, is hereby confirmed. 5. Section 34(c) (2) (c) of the Tax Code merely defers recognition of gain or loss from the transaction, for in determining the gain or loss from subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties or the stocks is considered. Thus, your opinion that the cost basis of the shares of stock shall be the same as the original acquisition cost or adjusted cost basis to the transferor, JGSHI, of the property exchanged therefor, and that the cost basis to the transferee, LMI, of the properties exchanged for stocks shall be the same as it would be in the hands of the transferor JGSHI (Section 34(c) (5) (a) and (b), Tax Code, as amended by Presidential Decree No. 1773) is hereby confirmed. 6. The transfer by JGSHI of the aforementioned properties in exchange for LMI 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; 7. The certificates of stock to be issued to LMI are, in all probability original issues which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended; 8. Pursuant to Section 196 of the Tax Code, as amended, conveyance of 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 transfer (BIR Ruling No. 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. In connection with the aforementioned exchange, 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 stocks 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 stocks/properties received in the exchange. The parties shall also cause to be annotated on the Transfer Certificates of Title and at the back of the Certificates of Stock, 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. 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. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue