Metropolitan Management Corporation

July 15, 2020 BIR RULING NO. S40-0384-2020 Sec. 40 (C) (2) & (6) (b); RR 18-01; BIR Ruling No. 214-12; BIR Ruling No. 100-17; BIR Ruling No. 075-18; BIR Ruling No. 1422-2018 Metropolitan Management Corporation 7th Floor, Republic Glass Building, 196 Salcedo Street Legaspi Village, 1229 Makati City Attention: Mr. Geronimo F. Velasco, Jr. President Gentlemen : This refers to your letter dated March 13, 2018 requesting that the merger between Metropolitan Management Corporation ("MMC") and Cello Realty Corporation ("Cello"), with the former as the surviving entity constitutes as a tax-free merger pursuant to Section 40 (C) (2) and (6) (b) of the Tax Code of 1997, as amended. Background MMC is a corporation duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of _________ Pesos (PhP__________) divided into ____________ shares with a par value of PhP__________ per share. The total capital stock issued and outstanding amounts to PhP__________ representing ________ shares at the par value of PhP__________ per share, excluding _________ treasury shares with a value of PhP__________. Cello is a corporation duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of ____________________ Pesos (PhP___________) divided into __________ shares with a par value of PhP___________ per share. The total capital stock issued and outstanding amounts to PhP___________ divided into ___________ shares. The Board of Directors as well as the stockholders of both corporations approved the merger considering the numerous business advantages. The said corporations considered the following reasons: (1) The integration of the administrative facilities of the two companies will result in economy of scale and efficiency of operations; (2) The consolidation of the assets of the two companies will allow the procurement of financing and credit facilities under more favorable terms; and (3) The consolidation of the assets of the two corporations will result into a maximization of revenues and profits from the use of the said assets. On April 14, 2011, the special meetings of the Board of Directors and of the stockholders of MMC were conducted. On the said respective dates, the Plan of Merger was approved by the majority vote of members of the Board of Directors of MMC, and by affirmative vote of the stockholders owning or representing at least two-thirds (2/3) of the total outstanding capital stock of MMC. CAIHTE On April 14, 2011, the special meetings of the Board of Directors and of the stockholders of Cello were also conducted. Likewise, in their respective meetings, the Plan of Merger was approved by the majority vote of members of the Board of Directors of Cello, and by the affirmative vote of the stockholders owning or representing at least two-thirds (2/3) of the total outstanding capital stock of Cello. Pursuant to the Plan of Merger (1) Cello shall merge into MMC and Cello's corporate existence shall cease upon approval of the merger by the SEC. (2) All the rights, business, assets and other properties of Cello including but not limited to, all real and personal properties, contractual rights, licenses, privileges, property rights, claims, bank deposits, stocks, accounts receivables, credit lines, supplies, equipment, and such other assets as shown in the audited balance sheet of Cello as of December 31, 2010 shall be conveyed, assigned and transferred to MMC in consideration for shares of stock of MMC. It is understood that whatever assets may not have been reflected in the said balance sheet of Cello as of December 31, 2010 or may have been omitted therefrom for any reason whatsoever, as well as all other assets which may come into their possession, or to which they may be entitled after the aforesaid date and until the approval of the merger by the SEC shall be deemed included in the conveyance, assignment and transfer. Furthermore, all transactions entered into by Cello during the said period shall be for the account of MMC. (3) Upon approval of the merger, MMC shall be the surviving corporation and its corporate existence shall continue. MMC shall by operation of law, or otherwise, become the owner of all the rights, assets, privileges and other properties of the constituent corporations and shall assume all the debts and liabilities of the constituent corporations in the same manner as if MMC had itself incurred such liabilities and obligations and any such claim or action or proceeding against Cello shall be prosecuted by or against MMC provided however, that MMC may avail of all the defenses, rights, privileges, set offs and counterclaims which Cello may have had. (4) Upon approval of the merger (May 27, 2011) by the SEC: (a) MMC will be deemed to have acquired all the assets and assumed all the liabilities of Cello and shall thereupon issue in exchange therefor MMC shares. Cello shall confirm the conveyance of such assets to MMC as of the date of approval of the merger. (b) The shares of Cello then outstanding in the hands of their stockholders shall be exchanged for shares of the capital stock of MMC on the basis of the net transfer value of the assets transferred to MMC. The assets will be transferred at the value as determined on the basis of the audited financial statements as of December 31, 2010. (c) For purposes thereof, on the basis of the audited financial statements as of December 31, 2010, MMC shall issue _______ MMC shares with par value of PhP_______ per share equivalent to the net equity of Cello, to Cello stockholders. These shares are to be taken from the _______ unissued shares of the capital stock of MMC. The present outstanding capital stock of Cello shall be retired and cancelled. The excess of the net equity of Cello, if any, over the total par value of the MMC shares to be distributed to the Cello stockholders shall be treated in the books of MMC as additional paid-in capital. It is understood, however, that the above valuations and exchange shall be subject to whatever adjustments the SEC may make in order that it will approve the merger. Should this happen, the parties shall execute such documents and do all acts as may be necessary to implement such adjustments. (d) Outstanding shares in the capital stock of Cello shall be deemed exchanged for the shares of capital stock of MMC pursuant to this Agreement. Shares of capital stock of Cello shall be deemed to have been issued on the date of approval of merger. (5) The stockholders of Cello shall, upon approval of the merger by the SEC, be deemed to be and shall become stockholders of MMC. DETACa (6) The basis of MMC stock received by the stockholders of Cello pursuant hereto shall be in the hands of such stockholders, the same as the basis of the Cello stocks surrendered in exchange therefor. The basis of the assets and properties transferred pursuant to this Agreement shall be, in the hands of MMC, the same as if it would have been in the hands of Cello. In reply thereto, please be informed as follows: 1. The foregoing merger of Cello and MMC is a merger within the contemplation of Section 40 (C) (2) (a) in relation to 40 (C) (6) (b) of the Tax Code of 1997 (the "Tax Code"), as amended, because MMC shall acquire/assume all the assets and liabilities of Cello and the same is advisable, expedient and in the best interest of the merging corporations and their respective stockholders, since the merging corporations are both engaged in the real estate and property management business. Hence, the merger of Cello and MMC is being undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation. The merger of Cello and MMC qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 40 (C) (2) of the Tax Code that no gain or loss shall be recognized by Cello, as the transferor of all assets and liabilities, to MMC pursuant to the Plan of Merger. Accordingly, no gain or loss shall be recognized by MMC, as the transferee, on its receipt of the assets and liabilities of Cello pursuant to and as a consequence of the merger. On the other hand, the basis of the shares of stocks to be received by the shareholders of Cello upon the exchange shall be the same as the basis of the properties, stocks or securities exchanged, decreased by (1) the money received, and (2) the fair market value of the other property/ies received and increased by (a) the amount treated as dividend of the shareholders and (b) the amount of any gain that was recognized in the exchange. (Sec. 40 (C) (5) (a) of the Tax Code of 1997, as amended) The basis of the properties transferred in the hands of the transferee (MMC) shall be the same as it would be in the hands of the transferor (Cello) increased by the amount of the gain, if any, recognized to the transferor (Cello) on the transfer. (Sec. 40 (C) (5) (b), supra) Finally, if the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total of the adjusted basis of the properties transferred pursuant to such exchange, then such excess shall be considered as a gain, on the part of the transferor, from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be. (Sec. 40 (C) (4) (b), supra ) Accordingly, the allocated shares and liabilities, and the substituted basis of the assets transferred by Cello to MMC, based on Cello's audited financial statements as of December 31, 2010 shall be as follows: aDSIHc Amount (in Php) Allocated Liabilities Allocated Shares Substituted Basis (in Php) Cash and Cash Equivalents Receivables Other current assets Long-term investments Investment properties (_______) TCT No. ______ TCT No. ______ TCT No. ______ TCT No. ______ TCT No. ______ Warehouse, Building & Improvements T.D. No. _________ T.D. No. ______ T.D. No. ______ T.D. No. ______ T.D. No. ______ T.D. No. ______ T.D. No. ______ T.D. No. ______ TOTAL Liabilities Amount (in PhP) Bank Loans Accounts Payable and other current liabilities Income Tax Payable Deferred tax liabilities Total 2. Well-settled in our jurisprudence is the fact that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor; (2) the increase in the patrimony of the donee; and (3) the intent to do an act of liberality (animus donandi) . Clearly, there is no intention on the part of any of the parties to the merger Cello to donate to MMC its assets since the transaction is purely for a legitimate business purpose. Thus the aforesaid merger will not be subject to gift tax since there is no intention to donate, and the transaction is a bona fide merger effected solely for business reasons. 3. No DST is due on the transfer made pursuant to the Plan of Merger under Section 199 (m) of the Tax Code, as amended by Republic Act (R.A.) No. 9243, in relation to Section 40 (C) (2) of the Tax Code. However, the original issuance of shares by MMC to the stockholders of Cello as a consequence of the merger shall be subject to DST at the rate of P______ on each P______ par value, or fractional part thereof, as provided under Section 174 of the Tax Code, as amended. 4. Section 105 of the Tax Code of 1997, as amended, identifies the persons liable for the Value-Added Tax. Thus, "SECTION 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. xxx xxx xxx." However, Section 4.109-1 (B) (1) (x) of Revenue Regulations (RR) No. 13-2018, implementing Section 34 of Republic Act (RA) No. 10963, specifically excludes transfers of property pursuant to Section 40 (C) (2) of the Tax Code, as amended, from being subject to output tax. Hence, ETHIDa "SEC. 4.109-1. VAT-Exempt Transactions. xxx xxx xxx (B) Exempt transactions. (1) Subject to the provisions of Section 4.109-2 hereof, the following transactions shall be exempt from VAT: xxx xxx xxx (x) Transfer of Property pursuant to Section 40(C)(2) of the Tax Code, as amended;" Thus, the above-mentioned transaction shall not be subject to VAT, and any unused input VAT of Cello as of the effective date of merger will be transferred to and absorbed by MMC pursuant to Section 4.109-1 (B) (1) (x) of RR No. 13-2018, the said transfer being considered a VAT-exempt transaction under the said Section. (BIR Ruling No. 1422-2018 dated December 7, 2018) 5. The excess and unutilized creditable withholding taxes (CWT) of Cello as of the effective date of the merger, which form part of the assets to be transferred by Cello to MMC as a consequence of the merger, may be applied as a tax credit or be the subject of a claim for refund or issuance of tax credit certificate (TCC) by MMC against its income tax due for the taxable year 2012, the effective date of the merger being May 27, 2011. 6. The excess and unexpired MCIT of Cello as of the effective date of the merger as of year 2011, if any, shall be carried forward and credited against the normal income tax due of the surviving corporation, MMC, for the three (3) immediately succeeding taxable years pursuant to Section 27 (E) (2) of the Tax Code, as amended. 7. It is to be emphasized, however, that the net operating loss carry-over (NOLCO) under Section 34 (D) (3) of the Tax Code, and as implemented by Revenue Regulations No. 14-2001, of Cello, if any, is not one of their assets that can be transferred and absorbed by the surviving corporation, MMC, as this privilege or deduction can be availed of by Cello only. Accordingly, the tax-free merger between Cello and MMC does not cover the NOLCO of the former. In order that the above-described reorganization can be considered as merger under Section 40 (C) (2) and (6) (b) of the Tax Code of 1997, as amended, the parties to the merger should comply with the following requirements set forth under Revenue Regulations No. 18-2001: A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation, which is a party to the reorganization, shall file, as part of its return for the taxable year within which the reorganization occurred a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including: 1. A copy of the plan of reorganization, together with a statement executed under the penalties of perjury, showing in full the purposes thereof and in detail all transactions incident to, or pursuant to the plan; 2. A complete statement of all cost or other basis of all property, including all stocks or securities, transferred incident to the plan; 3. A statement of the amount of stock or securities and other property or money received from the exchange, including a statement of all distribution or other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value thereof at the date of the exchange; 4. A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject. cSEDTC B. Every taxpayer, other than a corporation, party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the non-recognition of gain or loss upon such exchange, including: 1. A statement of the cost or other basis of the stock or securities transferred in the exchange; and 2. A statement in full of the amount of stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property received is subject. The amount of each kind of stock or securities and other property (other liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at the date of the exchange. C. Records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liabilities assumed on the exchange, or any liabilities to which any of the properties received were subject), in order to facilitate the determination of gain or loss from subsequent disposition of such stock or securities and other property received from the exchange. In addition to the foregoing requirements, the parties shall enclose with their respective income tax returns for the taxable year in which the merger occurred a copy of the request for ruling filed with, and the corresponding ruling issued by, the Bureau of Internal Revenue, both duly stamp-received by the appropriate office of the Bureau of Internal Revenue. Such parties shall include as a note to their respective audited financial statements for the taxable year in which the merger occurred a statement to the effect that they hold such assets/shares acquired in a merger and the year in which such merger occurred, and in the taxable years until the subject properties are subsequently transferred to another transferee. Moreover, the shareholders of the absorbed/dissolving corporation and the surviving/transferee corporation shall record in their respective books of accounts the mandatory accounting entries stated in Annex "A" hereof, pursuant to Revenue Memorandum Order No. 17-2016. Finally, the parties are required to submit to the Law and Legislative Division, Bureau of Internal Revenue, proof of annotation of the substituted basis of the shares of stock and/or real properties involved in the transfer within ninety (90) days from receipt of this ruling. Violation of this requirement is subject to the penalties provided in Section 275 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. SDAaTC Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue ANNEX A Investment Properties (Land and Improvements) Transfer Certificates of Title No./Tax Declaration Nos. Original/Adjusted Basis (in PhP) TCT No. TCT No. TCT No. TCT No. TCT No. Warehouse, Building & Improvements T.D. No. T.D. No. T.D. No. T.D. No. T.D. No. T.D. No. T.D. No. T.D. No. ================== TOTAL *Journal Entry to Record the Tax-Free Exchange Investment in ____________________ (name of transferee) xxx.xx Investment in ____________________ (issuing corp., for shares of stock) xxx.xx Investment in ____________________ (name of dissolving corporation) xxx.xx PPE Land & Improvement (for real props.) xxx.xx Dividend Income (net of FWT on dividend) xxx.xx Other Assets (as applicable) xxx.xx To record the Tax-Free Exchange (TFE) of investment in ___________ (share type) shares of ____________________ (name issuing corporation/s) with aggregate fair market value of P_______ in exchange for ____________________ (type and no. of share) of ____________________ (name of transferee) with par value of P____ per share. Liabilities xxx.xx Capital Stock xxx.xx Additional Paid-In Capital xxx.xx To record the Tax-Free Exchange (TFE) of real properties, investment in __________ (share type) shares of ____________________ (name issuing corp./s), and other assets with aggregate fair market value of P_____, including liabilities assumed resulting from merger, in exchange for ____________________ (type and no. of share) of ____________________ (name of transferee) with par value of P_____ per share. Balance Sheet Notes Entry Investment includes ____________________ (no. and type of share/s) with par value of P______ in ____________________ (name of transferee) resulting from the Tax-Free Exchange of investment in ____________________ (no. and type of share/s) of ____________________ (issuing corporation/s) covered by Stock Certificate No/s. ______ which were acquired for the total cost of ____________________ (substituted basis) and which have fair market value as of the date of exchange amounting to P_______. Real properties, investment in (no. and type of share/s) of ____________________ (issuing corporation/s) and other assets were acquired through merger as evidenced by Plan of Merger and Articles of Merger, including the increase of the Authorized Capital Stock of (name of transferee), approved by the Securities and Exchange Commission on ________ (date). The total acquisition cost/substituted cost to ____________________ (name of transferee) of the investment/s amounts to ____________________ (FMV at the time of exchange). The real properties, investment/s and other assets were previously covered by Transfer Certificate of Title and Stock Certificate No/s. ______ issued by ____________________ (issuing corporation/s) and are now presently covered by Stock Certificate No/s. ______ constituting (no. and type of share/s) [total] shares in the name of ____________________ (name of transferee). Proforma Entries to Record Subsequent Sale/Transfer Cash or Accounts Receivables xxx.xx Cash or Accounts Receivables xxx.xx Investment in ____________________ (name of transferee) xxx.xx Investment in ____________________ (name of issuing corporation)/PPE Land & Improvement/Other Assets) xxx.xx Gain on Sale of Investment xxx.xx Gain on Sale of Investment xxx.xx To record subsequent sale/transfer of investment acquired thru Tax-Free Exchange To record subsequent sale/transfer of real properties, investment/s and/or other assets acquired thru Tax-Free Current xxx.xx Current xxx.xx Tax Payable xxx.xx Tax Payable xxx.xx Provision for Tax as follows: Provision for Tax as follows: Tax Type Tax Rate* Multiply By Amount Tax Type Tax Rate* Multiply By Amount 1) Net Capital Gains Tax 5% on P100,000 and 10% on excess Gains realized on TFE xxx.xx 1) Net Capital Gains Tax 15% Gains realized on subsequent sale of investment/s xxx.xx OR Stock Transaction Tax 1/2 of 1% FMV of inv/s at the time of the TFE OR Stock Transaction Tax 6/10 of 1% Selling Price of investment at the time of subsequent sale 2) Net Capital Gains Tax 15% Gains realized on subsequent sale of investment/s xxx.xx Total Tax Payable xxx.xx OR Stock Transaction Tax 6/10 of 1% Selling Price of investment at the time of subsequent sale Total Tax Payable xxx.xx Tax Type Rate Multiply By Amount * If subsequent sale/s of investment/s was/were made before January 1, 2018, the tax rates used in the computation of Net Capital Gains Tax and Stock Transaction Tax at the time of tax-free exchange shall apply. 1) Withholding Tax ONETT 1.5% to 6% per RR No. 6-2001 Fair Market Value (FMV) of the property/ies at the time of subsequent sale/transfer xxx.xx * Computation of Gain Realised on Subsequent Sale of Investment: 2) Documentary Stamp Tax (DST) 1.5% for every P1,000 and fractional part thereof xxx.xx Selling Price xxx.xx 3) Value-Added Tax (VAT) 12% xxx.xx Total Tax Payable xxx.xx Less: Cost (Substituted Basis) xxx.xx Net Capital Gain on sale of unlisted shares xxx.xx ===== * Gain on sale of property/ies is subject to Normal Corporate Income Tax (NCIT) * FMV at the time of subsequent sale/transfer refers to the selling price, zonal value or the value reflected in the declaration, whichever is highest. * Per RMO 17-2016, the substituted basis of the stock or securities received by the transferor on a tax-free exchange shall be as follows: (1) The original basis of the property, stock or securities to be transferred; (2) Less: (a) money received, if any, and (b) the fair market value of the other property received, if any; and (3) Plus: (a) the amount treated as dividend of the shareholder, if any, and (b) the amount of any gain that was recognized on the exchange, if any.