Tax Consequence of the Transfer of FBCOP Shares

September 29, 1988 BIR RULING NO. 466-88 25 (b) (5) (C) (i) 161-83 466-88 Gentlemen : This refers to your letter dated August 22, 1988 requesting in behalf of your client, Franklin Baker Co. of the Philippines (FBCOP) a ruling on the tax consequence of the transfer by General Foods Manufacturing Corporation (GFMC) of its FBCOP shares to General Foods Corporation (GFC) pursuant to the merger of GFMC into GFC. cdtech It is represented that FBCOP is a domestic corporation with an outstanding capital stock of 135,000 shares of which 134,995 shares are owned by GFMC, a U.S. corporation; that the remaining five (5) FBCOP shares are held as qualifying shares by the five (5) FBCOP directors; and that the 134,995 FBCOP shares in the name of GFMC will be cancelled and new certificates will be issued to GFC as a result of the aforementioned merger in which GFMC is absorbed by GFC. In reply thereto, please be informed that on the basis of the facts as herein represented, no sale, exchange or disposition of stock took place between GFMC and GFC because there is no effective transfer of beneficial ownership. In a merger, the absorbing corporation (GFC) succeeds to the rights and liabilities of the absorbed corporation (GFMC) and merely carries on the identity of the latter (GFMC) (Cashman V. Brownlee, 27 N.E. 560). Consequently, no gain was realized by GFMC. Moreover, assuming that gain was realized, the same is exempt from capital gains tax imposed by Section 25(b)(5)(C)(i) of the Tax Code, as amended, in accordance with Article 14(2) of the RP-US Tax Treaty. Hence, 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: "Notwithstanding the provisions of Article 14 of the Convention relating to capital gains, both the Philippines and the United States may tax gain from the disposition of an interest in a corporation of its assets consist principally of a real property interest located in that country: Likewise, both countries may tax gain 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 interest in a corporation of its assets consist principally of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of values (Sec. 2, Revenue Regulations No. 4-86) In the instant case, GFMC's audited balance sheet as of December 31, 1987 shows that its real property or fixed assets is less than 50% of its total assets. (BIR Ruling No. 042-87) Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner