Tax Consequence of a Condonation of a Portion of an Original Loan

July 6, 1988 BIR RULING NO. 300-88 91 270-87 300-88 S i r : This refers to your letter dated June 15, 1988 stating that Nitro Nobel, A.B. (NNAB), a Swedish corporation, owns forty (40%) percent of the Capital stock of Nobel Philippines, Inc. (NPI), a domestic corporation organized under Philippine Laws; that NPI obtained a loan from 2 British banks wherein one of the counter co-guarantors is NNAB; that NPI was unable to pay the loan and is now in the process of negotiating for its restructuring; that as part of the restructuring arrangement, NNAB will pre-pay and assume the original loan; that portion of the loan assumed will later on be condoned and be converted into paid-in surplus of NPI (without the corresponding issuance of additional shares) and then used to wipe out its accumulated losses. In connection therewith, you now request a ruling to the effect that the condonation of a portion of the original loan to be made by NNAB, a principal stockholder of Nobel Philippines, Inc., converted into paid-in surplus or donated surplus is not subject to the donor's tax under Section 91 of the Tax Code, as amended. In reply thereto, I have the honor to inform you that since the condoned portion of the original loan converted into paid-in surplus or donated surplus represents additional capital contribution, said condoned portion is not subject to the donor's tax. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner