Interest Expenses on the Loan Incurred in Relation to the Acquisition of the Assets and Inventories

December 27, 1988 BIR RULING NO. 600-88 29 (a) (1) (A) 000-00 600-88 Gentlemen : This refers to your letter dated August 30, 1988 stating that various companies were organized for the purpose of acquiring various existing companies; that the newly organized companies acquired the assets and inventories of the existing companies; that after the assets and inventories are sold, the stockholders of the existing companies remain the same; that the companies which sold the assets and inventories continue to exist; that what were acquired by the newly organized companies are assets and inventories and not shares of stock; that the assets and inventories are in use or ready for the intended use of the newly organized companies; that the funds used to acquire the assets and inventories were loaned from various financial and non-financial institutions ranging from six to fifteen years; and that the newly organized companies which acquired the assets and inventories from the existing companies incurred interest expense. In connection therewith, you now request confirmation of your opinion to the effect that the interest expenses on the loan incurred in relation to the acquisition of the assets and inventories should be treated as ordinary and necessary business expenses because the same were incurred in relation to the ordinary and normal business activities. In reply thereto, I have the honor to inform you that pursuant to Section 29(b)(l) of the Tax Code, as amended, the amount of interest paid or accrued within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business except on indebtedness incurred or continued to purchase or carry obligation the interest upon which is exempt from taxation as income is deductible from gross income. Since the interests to be paid by the newly organized companies were on their loans obtained from various financial and non-financial institutions used by them in connection with their business, i.e., acquisition of the assets and inventories of existing companies, said interests are deductible from their gross income under Section 29(b)(l) of the Tax Code, as amended. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner