BIR Ruling No. 550-12

August 31, 2012 BIR RULING NO. 550-12 Sections 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended BJSC Infinite 8, Inc. 35 Sanciangco St. Tonsuya, Malabon City Attention: Lilibeth Pe Chua Treasurer Gentlemen : This refers to your letter dated July 25, 2011 requesting a confirmatory ruling of your opinion that the transfer of the real property by Nicolasita Pe Chua in favor of BJSC INFINITE 8, INC., solely in exchange for shares of stocks of the latter will neither result in a taxable gain or profit pursuant to Section 40 (C) (2) (c) of the Tax Code of 1997. It appears that BJSC INFINITE 8, INC. is a corporation duly organized and existing under Philippine laws, with principal office address at 35 Sanciangco St., Tonsuya, Malabon City. It has an authorized capital stock consisting of One Hundred Thousand (100,000) shares with a par value of One Hundred Pesos (P100.00) per share, of which Twenty Five Thousand (25,000) shares are subscribed and Six Hundred Twenty Five Thousand Pesos (P625,000.00) were paid. The capital and shareholding structure of BJSC INFINITE 8, INC. before the transaction is as follows: Subscriber No. of Shares Amount Subscribed Amount Paid Nicolasita Pe Chua 15,000 P1,500,000.00 P375,000.00 Lilibeth Pe Chua 2,500 250,000.00 62,500.00 Sally Pe Chua 2,500 250,000.00 62,500.00 Jerry Pe Chua 2,500 250,000.00 62,500.00 Christopher Pe Chua 2,500 250,000.00 62,500.00 Total 25,000 P2,500,000.00 P625,000.00 ======= ============ ========== On the other hand, Nicolasita Pe Chua is the registered owner of parcels of land covered by two (2) Transfer Certificates of Title, to wit; ICASEH TCT No. Area (sq.m.) Tax Declaration No. M-434 900.38 B-020-02534 M-6217 900.38 B-020-02763 On August 2, 2011, a Deed of Conveyance was executed by Nicolasita Pe Chua whereby it transfers and assigns to BJSC INFINITE 8, INC., the above mentioned properties in exchange for its unpaid shares of stocks in the total amount of P1,125,000.00. Following the completion of the transfer and assignment by Nicolasita Pe Chua to BJSC INFINITE 8, INC., the capital and shareholding structure of BJSC INFINITE 8, INC. shall be as follows: Subscriber No. of Shares Amount Subscribed Amount Paid Nicolasita Pe Chua 15,000 P1,500,000.00 P1,500,000.00 Lilibeth Pe Chua 2,500 250,000.00 62,500.00 Sally Pe Chua 2,500 250,000.00 62,500.00 Jerry Pe Chua 2,500 250,000.00 62,500.00 Christopher Pe Chua 2,500 250,000.00 62,500.00 Total 25,000 P2,500,000.00 P1,750,000.00 ====== ============ ============ In reply, please be informed that pursuant to Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, 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. Moreover, portion of IV of Revenue Memorandum Ruling No. 01-01 1 dated November 29, 2001, provides; IV FURTHER CLARIFICATION OF FACTS AND TAX CONSEQUENCES xxx xxx xxx 2. No. 3 of "I. Facts" mentions the issuance of the Transferee's shares from the "unissued portion of its existing authorized capital stock, or, if such existing authorized capital stock is insufficient, out of shares from an increase in the Transferee's authorized capital stock". This statement of fact excludes the following , which if present, would give rise to a different tax consequence treated elsewhere other than in this Revenue Memorandum Ruling SDaHEc xxx xxx xxx 2.2. Settlement of subscription receivables Therefore, the tax consequences described above shall not apply to the extent that the property is transferred in payment for the unpaid balance of the subscription to shares. (emphasis supplied) Hence, the transaction cannot legally qualify as a tax-free exchange under Section 40 (C) (2) of the Tax Code, as amended. Accordingly, your request is hereby denied for lack of legal basis. However, the transfer of properties in payment for the unpaid balance of the subscription to shares shall be treated as "dation in payment", thus the transfer shall be subject to Capital Gains Tax and Documentary Stamp Tax pursuant to Sections 24 (D) (1) and 196 of the Tax Code of 1997, as amended. Pursuant to Article 1232 of the Civil Code, an obligation is extinguished by payment or performance. There is payment when there is delivery of money or performance of an obligation. 2 Article 1245 of the Civil Code provides for a special mode of payment called dation in payment ( dacin en pago ). There is dation in payment when property is alienated to the creditor in satisfaction of a debt in money. 3 Here, Nicolasita Pe Chua delivers and transmits to BJSC INFINITE 8, INC. the former's ownership over a parcels of land as an accepted equivalent of the payment for the unpaid balance of the subscription to shares. In such case, Article 1245 provides that the law on sales shall apply, since the undertaking really partakes in one sense of the nature of sale; that is, the creditor is really buying the thing or property of the debtor, the payment for which is to be charged against the debtor's obligation. 4 Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement express or implied, or by their silence consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished. 5 Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Tax Consequences of Tax-Free Exchange of Property for Shares of Stock of a Controlled Corporation Pursuant to Section 40 (C) (2) of the National Internal Revenue Code of 1997. 2. CIVIL CODE, Art. 1232. 3. CIVIL CODE, Art. 1245. 4. Aquintey v. Tibong, G.R. No. 166704, 20 December 2006, 511 SCRA 414, citing Jayme v. Court of Appeals , 439 Phil. 192 (2002); CIVIL CODE, Art. 1245. 5. TAN SHUY v. SPOUSES MAULAWIN, G.R. No. 190375, February 8, 2012.