Tax Consequence of the Transfer of Shares of a Foreign Corporation to a Wholly Owned Subsidiary

December 8, 1992 BIR RULING NO. 351-92 24 295-88 351-92 Sycip, Gorres Velayo & Co. P.O. Box 256 Makati Central Post Office 1299 Metro Manila Attention: Atty . J . A . Osana Tax Division Gentlemen : This refers to your letter dated April 2, 1992 stating that your client, American Standard, Inc. (ASI) is a foreign corporation duly organized and existing under and by virtue of the laws of the State of Delaware, U.S.A. ; that it does not engaged in any business activity in the Philippines; that it owns certain shares in Sanitary Wares Manufacturing Corporation (SWMC) a corporation organized and existing in accordance with Philippine laws; that on February 1991 ASI filed with the Securities and Exchange Commission an application for the incorporation of a wholly-owned subsidiary, American Standard Philippine Holdings, Inc. (ASPHI), the primary purpose of which shall be: LLpr "To engage in the business of investment by way of purchase or acquisition of any share of shares or interest in corporations, associations, partnerships, banks or any other business entity, and generally deal in and with all kinds of shares of stock, voting trust certificates, bonds, mortgage, debentures, trust receipts, notes and other securities, obligations, contracts, certificates of interest, choses in action and evidence of indebtedness in general of any corporation, association, partnership, banks or any other business entity of its own account without necessarily engaging as stock brokers or dealers of securities, to manage any business, firm or corporation or otherwise act as managers of said business, firm or corporation thereof, except the management of funds, securities, portfolios and other similar assets of any firm or entity." that to fulfill its primary purpose overseeing the investments of its parent company, ASI now proposes to transfer its investment in shares of stock of SWMC to ASPHI as contributed capital; and that no shares of stock will be issued by ASPHI to ASI in exchange therefor. In connection therewith, you now request confirmation of your opinion, as follows: "1. The transfer of the SWMC shares by ASI to ASPHI is not subject to capital gains tax imposed under Section 25(b)(5)(c) of the Tax Code, as amended; "2. The transfer of the SWMC shares will not constitute taxable income to ASPHI; and "3. ASI will not be subject to donor's tax for the transfer of the SWMC shares. In reply thereto, I have the honor to inform you that since the SWMC shares are not being sold or transferred by ASI to ASPHI for a valuable consideration but are being transferred as additional capital contribution, without the necessity of ASPHI issuing additional shares of stock; and considering further that the transferred SWMC shares will merely increase the basis of the principal stockholder's (ASI) stocks but will not change its proportionate equity in ASPHI, the transfer of the SWMC shares will not constitute taxable income but as capital investment, hence, it is not subject to income tax as well as to the donor's tax. (BIR Ruling No. 270-87 dated September 8, 1987; BIR Ruling No. 586-88 dated December 18, 1988). prll The aforementioned transfer of SWMC shares of stock by ASI to ASPHI is subject to the documentary stamp tax pursuant to Section 176 of the Tax Code, as amended. (Sec. 20, Revenue Regulations No. 26 or the Documentary Stamp Tax Regulations). Finally, even assuming that capital gains was realized by ASI as a result of the aforesaid transfer, nevertheless, said gain shall be taxable only in the United States pursuant to Article 14(2) of the RP US Tax Treaty. Accordingly, said gain is not subject to Philippine tax. The Reservation Clause of the RP US Tax Treaty, pertinent portion of which is quoted hereunder as follows: "Article 1 " Notwithstanding the provisions of Article 14 of the Convention relating to capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of a real property interest located in that country . Likewise, both countries may tax gains from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term "real property interest: is to have the meaning it has under the law of the country in which the underlying real property is located." (Emphasis supplied) does not apply in this case. It is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consist principally which means more than 50% of real property interest located in the Philippines. In the instant case, the undated Memo-Report of Examiner, Bienvenido S. Barcarse of the Special Investigation Branch, Revenue Region No. 4B-2, Makati, Metro Manila as well as SWMC's Financial Statements as of December 31, 1991 shows that SWMC's real property or fixed assets is only 1.80% or less than 50% of its total assets. cdta Very truly yours, VICTOR A. DEOFERIO, JR. Commissioner of Internal Revenue (Officer-In-Charge)