Tax Consequence of a Bank Transfer and Conveyance of a Real Property

November 16, 1988 BIR RULING NO. 549-88 34 (c) (c) (c) 421-88 549-88 Gentlemen : This refers to your letter dated July 11, 1988 stating that your client, Equitable Banking Corporation (EBC), a banking institution (with authority to operate as a universal bank) organized and existing under and by virtue of Philippine laws with principal offices at Sen. Gil Puyat Avenue corner Paseo de Roxas, Makati, Metro Manila, Philippines and China Nonferrous Metals Industry's Foreign Engineering and Construction Corporation (NFC), a corporation duly organized and existing under the laws of the People's Republic of China with offices at No. 9 Xizhang Hutong Xizhimenenei Dajie, Beijing, China, have entered into a Joint Venture Agreement (the Agreement) for the purpose of forming and establishing a corporation under Philippine laws for the primary purpose of engaging in real estate development; that the Philippine corporation contemplated to be formed under the Agreement, Equimark NFC Development Corporation (Equimark) will have an authorized capital stock in the amount of P75,000,000.00, divided into 750,000 shares with the par value of P100.00 per share; that EBC will subscribe to P45,000,000.00 and NFC to P30,000,000.00 of Equimark's total authorized capital stock or 60%/40% ratio; that considering Equimark's primary purpose real estate development the Agreement has taken into consideration or account EBC's real property consisting of an area of 6,400 square meters, more or less, located at Malugay, Makati, Metro Manila, with an estimated market value of P4.5 Million; and that EBC will transfer and convey unto and in favor of Equimark the abovementioned real property, together with cash approximately P40 Million (subject to adjustment based upon an appraisal report on the correct valuation of the real estate property)) in exchange for which Equimark will issue to EBC 450,000 shares of its capital stock, as a result of which EBC will own Sixty Percent (60%) of Equimark's total subscribed shares. cdt Based on the foregoing representations, you now request confirmation of your opinion that the proposed transfer by EBC of its real estate property to Equimark, together with cash consideration, in exchange for Equimark's shares of stock, as a result of which EBC will own 60% of Equimark's total subscribed (or total authorized) capital stock, is tax-exempt under the provisions of Sec. 34(c)(2)(c) of the National Internal Revenue Code, as amended. In reply, I have the honor to inform you that pursuant to Section 34, paragraph (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 stock 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 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 to the effect that no gain or loss shall be recognized both to the transferor, Equitable Banking Corporation and the transferee corporation, Equimark NFC Development Corporation, considering that after the proposed exchange and as a result of the proposed exchange, the transferors will gain control of Equimark-NFC Development Corporation is hereby confirmed. It should be emphasized, however, that 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 property or of the stocks involved in the exchange, the original or historical cost of the property or the stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by it in the exchange, it shall be subject to income tax on gains derived from such sale or exchange, taking into consideration 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 of the property exchanged therefor; and that the cost basis to the transferee of the property exchanged for stocks shall be the same as it would be in the hands of the transferor. [Section 34(c)(5)(a) and (b), Tax Code, as amended by Presidential Decree No. 1773] In this connection, you are further advised that in order that the parties to the proposed 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 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 property transferred, or of its interest in such property, which 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 the property received from the transferor; 2. A statement of the original acquisition cost or other basis of the property 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 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 stock/property received in the exchange. Moreover, 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 a parcel of land is exchanged with stocks in a corporation as what is contemplated in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the aforesaid deed. (BIR Ruling No. 274-87 dated September 9, 1987) Should the aforementioned proposed transaction materialize and after payment of the corresponding documentary stamp tax, the aforesaid real property may be registered by the Register of Deeds concerned in the name of Equimark-NFC Development Corporation. Finally, the certificates of stocks to be issued by Equimark-NFC Development Corporation are, in all probability, original issues. Such being the case, said original issues are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner