Property Dividends Not Subj. to Withholding and Capital Gains Taxes

June 28, 1993 BIR RULING NO. 278-93 PROPERTY DIVIDENDS NOT SUBJ. TO WITHHOLDING AND CAPITAL GAINS TAXES 28 (b) (7) (B) 277-92 001-93 CFC Corporation E. Rodriguez Ave., Pasig Metro Manila Attention: Mr . Emmanuel C . Rojas, Jr . This refers to your letter dated May 7, 1993 stating as follows: "1. CFC Corporation (CFC), Universal Robina Corporation (URC), JG Summit Holdings, Inc. (JGSHI) and Land Co. are domestic corporations duly organized and existing under and by virtue of the laws of the Philippines. Both CFC and URC are presently wholly-owned by JGSHI. Land Co. is engaged in the real estate business; cdt "2. CFC owns several parcels of land with an aggregate carrying cost of P107,504,010 and a building in Cebu with a carrying cost of P236,000,000.00 for a total carrying cost of P338,615,251.00 while URC also owns several parcels of land with an aggregate carrying cost of P9,169,681. The covering Original/Transfer Certificates of Title (O/TCTs) of these properties are shown in the attached Annex 1; "3. CFC and URC will declare the real properties respectively owned by them as shown in the attached Annex 1 and property dividends to their stockholder, JGSHI; "4. At present, Land Co. has an authorized capital stock of P400,000.00, divided into 400,000 shares at the par value of P1.00 per share of which 60,000 Class A shares worth P60,000 and 40,000 Class B shares worth P40,000.00 have been subscribed and paid by the following persons: Class A Class B Total John Gokongwei, Jr. P12,000 P8,000 P20,000 Henry L. Go 12,000 8,000 20,000 James L. Go 12,000 8,000 20,000 Johnson Robert L. Go 12,000 8,000 20,000 Ignacio Gotao 12,000 8,000 20,000 Total P60,000 P40,000 P100,000 ====== ====== ======= "5. For the purpose of consolidating all the lands and Cebu building for real estate development purposes, JGSHI proposes to transfer the real properties received by it as property dividends from CFC and URC to Land Co., solely in exchange for shares of Land Co.'s capital stock, as follows: No. of Shares Amount Class A 208,670,960 P208,670,960.00 Class B 139,113,972 139,113,972.00 347,784,932 P347,784,932.00 ======== =========== "To generate the shares of stock to be issued solely in exchange for the abovementioned properties, Land Co. will increase its authorized capital stock to P500,000,000 or an increase of P499,600,000, divided into 299,760,000 Class A shares and 199,840,000 Class B shares at the par value of P1.00 per share. As a result of the above exchange, JGSHI will acquire more than 51% of the total subscribed voting stock of Land Co., as follows: Name of Class A Class B Total % to Total Subscriber JGSHI P208,670,960 P139,113,972 P347,784,932 99.970% John Gokongwei, Jr. 12,000 8,000 20,000 0.006 Henry L. Go 12,000 8,000 20,000 0.006 James L. Go 12,000 8,000 20,000 0.006 Johnson Robert Go 12,000 8,000 20,000 0.006 Ignacio Gotao 12,000 8,000 20,000 0.006 Total P208,730,960 P139,153,972 P347,884,932 100.000% ========== ========== ========= ======= "Shares of stock of Land Co. 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 to the effect that: "1. The property dividends consisting of several parcels of land and a building to be declared by CFC and URC, both domestic corporations to JGSHI, another domestic corporation, is not subject to any withholding tax and JGSHI, the recipient corporation will not be subject to any income or capital gains tax arising from the receipt of these real estate properties and building 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 dividends shall be recorded in the books of both CFC and URC, issuing corporations, and JGSHI, the recipient corporation at book value, and CFC and URC, the issuing corporations are not subject to any income or capital gains tax on the excess of the fair market value over the book value of the parcels of land and building declared as property dividends because there is no realized gain; cd "3. Upon the subsequent sale or other disposition of the real estate properties and building received as property dividends by JGSHI, the basis of the real properties and building shall also be their book value at the time of the property dividend declaration; "4. No gain or loss shall be recognized both on the part of JGSHI, the transferor, and Land Co., the transferee, on the transfer of the aforementioned parcels of land of real property and building solely in exchange for shares of stock of Land Co., considering that after the exchange and as a result of said exchange, JGSHI, the transferor, will gain control of Land Co., the transferee corporation, in accordance with Section 34(c) (2) of the Tax Code . . .; Since JGSHI, the transferor, will as a result of the transfer acquire more than 51% of the total subscribed voting stock of Land Co., the transfer qualifies for non-recognition of gain or loss under ... Section 34(c) (2) of the Tax Code; "5. The basis of the Land Co. shares of stock in the hands of JGSHI shall be the same as the basis in the properties exchanged by JGSHI; "6. The basis of the real properties from JGSHI in the hands of Land Co. shall be the same as this would be in the hands of JGSHI; "7. The transfer of the real properties and building to JGSHI in exchange for Land Co. 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; cd i "8. The original issues of the certificates of stock by Land Co. 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 the honor to inform you as follows: 1. Your opinion to the effect that the property dividends consisting of several parcels of land and a building to be declared by CFC and URC in favor of JGSHI is not subject to tax pursuant to Section 24(e) (4) of the Tax Code, as amended, is hereby confirmed. Moreover, the recipient corporation, i.e., JGSHI is not subject to any income or capital gains tax arising from its receipt of said parcels of land and building as property dividends; 2. Your opinion that the property dividends shall be recorded in the books of both CFC and URC, the issuing corporations, and JGSHI, the recipient corporation, at book value; and that CFC and URC are not subject to any income or capital gains tax on the excess of the fair market value over the book value of the parcels of land and building declared as property dividends because there is no realized gain is likewise hereby confirmed (BIR Ruling No. 276-91 dated December 26, 1991); 3. Your opinion that upon the subsequent sale or other disposition of the real estate properties and building received as property dividends by JGSHI, the basis of the real properties and building 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., subscribed, whether for property or for services by the transferors. In determining the 51% stock ownership, only those persons who transferred property for stocks 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 parcels of land and building in exchange for shares of stock of the transferee corporation, Land Co., considering that as a result of said exchange, JGSHI will gain control of Land Co. the transferee corporation, is hereby confirmed; 5. 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 a subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties or of 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 properties exchanged therefor; and that the cost basis to the transferee. Land Co. 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 real properties and building in exchange for Land Co. 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 stocks to be issued by Land Co. 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, 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, 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 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 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; 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