November 17, 2008

BIR RULING [DA-(C-133) 431-08]

DA-318-05; DA-030-05; 039-02

Francisco G. Tagao Law Office

Attention: Atty. Francisco G. Tagao

Gentlemen :

This refers to your letter requesting on behalf of your client, Fort Bonifacio
Development Corporation (FBDC), for con rmation of your opinion on the tax
implications arising from their conveyance of certain real properties in partial
redemption of the Preferred "B" shares owned by the Bases Conversion Development
Authority (BCDA).
It appears that FBDC is a real estate developer which owns substantial parcels of
land located at the former Fort Bonifacio, Taguig previously transferred by BCDA to
FBDC; that FBDC common stock is owned 55% by Bonifacio Land Corporation (BLC)
and 45% by BCDA; that the said common stock has a par value of P1.00 per share but
were issued at a premium of P0.50 per share; that the premium was re ected as
additional paid-in capital (APIC) in the books and in the Audited Financial Statements of
FBDC; that under the Amended Articles of Incorporation of FBDC, at the latter's option,
part of the common stock may be converted into Preferred "A" and "B" shares; that both
have the same par value of P1.00 per share as the common stock and are both non-
voting, redeemable and non-participating; that the Preferred "A" shares were issued to
BLC from a portion of the common shares of stock previously issued to it; that the
Preferred "B" shares of stock were issued to BCDA from a part of the common shares
of stock earlier issued to it; and that the Preferred "A" shares shall be redeemable at the
same time as the Preferred "B" shares are redeemed in such proportion as to maintain
the holders thereof as the owner of 55% of FBDC's total outstanding capital stock
under the terms and conditions as authorized by FBDC's Board of Directors. EIAaDC

It is further represented that the Preferred "B" shares issued to BCDA shall be
redeemable in tranches depending on the availability of the proceeds (Net Project
Proceeds) to be paid or received by FBDC from third party buyers, lessees or
occupants who shall have purchased, leased, occupied or used a nished real estate
product (or any right, title or interest therein) derived from the marketing and
development of parcels of land identi ed by FBDC's Board of Directors, subject to the
condition that in no case shall the redemption price be less than the cost of such
shares as recorded in the books of FBDC at the time of redemption; and that the
redemption features of the Preferred "B" shares and the Amended Articles of
Incorporation would be further amended to allow the partial redemption of certain
Preferred "B" shares owned by BCDA by conveying speci c real property of the
Northern Central Business District (NCBD).
You likewise stated that the parcels of land that will be speci cally conveyed by
CD Technologies Asia, Inc. © 2020 cdasiaonline.com
 FBDC in partial redemption of the Preferred "B" shares consist of an area of 6,147 sq.m.
coming from a portion of Block 22 covered by Transfer Certi cate of Title (TCT) No.
31307 and from a portion of Reserved Access Lot 1 covered by TCT No. 38105 and a
parcel of land consisting of 5,020 sq.m. being a portion of the lot covered by TCT No.
38167; that these are located at the NCBD of the former Fort Bonifacio now known as
the Bonifacio Global City; that these are covered by new Technical Descriptions which
are pending issuance of new TCTs by the Register of Deeds; that these parcels of land
have a zonal value of P100,000 per sq.m.; that the fair market values of the said parcels
of land as shown in the Real Property Tax Declarations issued by the Taguig Assessor
are very much lower that their zonal value; and that although the parties have agreed
that the Preferred "B" shares will be redeemed at a value in the form of real properties,
their zonal value is still higher than their agreed value.
On the bases of the foregoing, you now respectfully request for con rmation of
the following:
1. The transfer of speci c real properties of FBDC as stated and described
above in partial redemption of the Preferred "B" shares owned by
BCDA is not a sale or exchange and, therefore, FBDC does not realize
taxable gain or deductible loss in partial redemption of the Preferred
"B" shares which may be considered as akin to a partial liquidation of
a corporation because in partial liquidation and pursuant to the SEC's
Rules Governing Redeemable and Treasury Shares dated April 26,
1982, the redeemable shares so redeemed or reacquired shall be
considered retired and no longer issuable, unless otherwise provided
in the Articles of Incorporation. Since the Amended Articles of
Incorporation of FBDC does not provide otherwise, the redeemable
shares so reacquired shall be considered retired and no longer
issuable. As such, FBDC should not be liable to income tax on the
transfer of its real properties in partial redemption of the Preferred "B"
shares and on its receipt of the surrendered shares.
2. The transfer of the real estate properties by FBDC in partial redemption of
the Preferred "B" shares is not made in the course of trade or
business and thus the same is not subject to value-added tax (VAT).
ASCTac

3. Since the Preferred "B" shares arose merely from the reclassi cation of
the common shares having the same par value, then the allocable cost
of the common shares shall become the substituted cost (par value
plus the allocable additional paid-in capital). This is because the
conversion of the common shares into preferred shares pursuant to
their conversion features shall not be subject to capital gains tax
since the holders thereof merely change the form of their holdings.
4. No documentary stamp tax (DST) is due on the transfer of the real
properties by FBDC to BCDA in partial redemption of the Preferred "B"
shares pursuant to Section 189 of the Income Tax Regulations which
provides that the conveyance distributing in liquidation of real
properties by a corporation without valuable consideration to an
owner of all its capital stock is not subject to DST under Section 196
of the Tax Code of 1997.
The surrender of the redeemable Preferred "B" shares and their cancellation
CD Technologies Asia, Inc. © 2020 cdasiaonline.com
 or retirement is not subject to DST since the surrender of the
Preferred "B" shares does not constitute a sale, assignment or
transfer of the said shares as FBDC is not taking title to the
surrendered shares.
5. The difference between the fair market value as shown in the Real
Property Tax Declarations issued by the Taguig Assessor's O ce or
zonal value, whichever is higher, of the real properties and the
substituted cost of the Preferred "B" shares thus redeemed is subject
to the normal corporate income tax on the part of BCDA. Since BCDA
is subject to the normal corporate income tax based on the zonal
value or fair market value as per Real Property Tax Declaration issued
by the Taguig Assessor's O ce, the difference between the
redeemed value and the zonal value or fair market value per tax
declarations issued by the Taguig Assessor's O ce, whichever is
higher, is not a donation subject to donor's tax.
In reply, please be informed that we confirm as follows:
1. The conveyance of certain real properties owned by FBDC in partial
redemption of the Preferred "B" shares owned by BCDA is not subject to income tax
because it is not a sale or exchange. In BIR Ruling No. 017-92 dated May 28, 1992, BIR
Ruling No. 039-02 dated November 11, 2002, BIR Ruling No. DA-033-2005 dated
January 27, 2005 and BIR Ruling No. DA-318-05 dated July 15, 2005, this O ce ruled
that the transfer by the liquidating corporation of its remaining assets to its
stockholders is not considered a sale or exchange. Thus, a liquidating corporation does
not realize gain or loss in partial or complete liquidation. Conversely, neither is a
liquidating corporation subject to tax on its receipt of the shares surrendered by its
shareholders pursuant to a complete or partial liquidation. cDaEAS

This O ce likewise opined in BIR Ruling No. DA-318-05 dated July 15, 2005, that
"the redemption may be considered akin to a partial liquidation of a corporation
because as in partial liquidation, and pursuant to SEC's Rules Governing Redeemable
and Treasury Shares dated April 26, 1982, the redeemable shares so redeemed or
reacquired shall be considered retired and no longer issuable, unless otherwise
provided in the Articles of Incorporation. Since the amended AOI of MR will not provide
otherwise, the redeemable shares so reacquired shall be considered retired and no
longer issuable".
Such being the case, upon redemption of the redeemable preferred shares from
BCDA, FBDC will not be liable for income tax on the transfer of its real properties in
redemption of the Preferred "B" shares and on its receipt of the surrendered shares.
2. The transfer of the real estate properties by FBDC in partial redemption of the
Preferred "B" shares is not made in the course of trade or business and thus the same
is not subject to VAT. (BIR Ruling No. DA-033-2005 dated January 27, 2005; BIR Ruling
No. DA-164-04 dated April 5, 2004; BIR Ruling No. DA-318-05 dated July 15, 2005.
Thus, in BIR Ruling No. DA-318-05, the BIR ruled as follows:
"Moreover, in BIR Ruling DA-033-2005 dated January 27, 2005 and BIR
Ruling DA-164-04, dated April 5, 2004, this O ce held that the transfer by a
liquidating corporation of its properties is not made in the course of trade or
business and, thus, the same is not subject to 10% VAT. Furthermore, as
discussed above, in BIR Ruling No. 171-92 dated May 28, 1992; BIR Ruling No.
CD Technologies Asia, Inc. © 2020 cdasiaonline.com
 039-02 dated November 11, 2002, and BIR Ruling DA-033-2005 dated January 27,
2005, this O ce ruled that the transfer by the liquidating corporation of its
remaining assets to its stockholders is not considered as a sale of assets. This
being the case, the transfer by MR of the right to receive the depot royalties is not
a sale and, therefore, the same is not subject to VAT."

3. Since the Preferred "B" shares arose merely from the reclassi cation of the
convertible common shares having the same par value, then the allocable cost of the
common shares shall become the substituted cost of the Preferred "B" shares (par
value plus the allocable APIC). This is because the conversion of the common shares
into preferred shares pursuant to their conversion feature shall not be subject to capital
gains tax since the holders thereof merely change the form of their holdings. Thus, BIR
Ruling No. DA-030-05 dated January 24, 2005, states that:
"The conversion of the common shares into preferred shares shall not be
subject to capital gains tax since the holders thereof merely change the form of
their shareholdings from common shares to preferred shares and they do not
realize any gain or economic bene t therefrom. (BIR Ruling No. [DA-141-99] dated
March 9, 1999)
The exchange of common shares into preferred shares quali es as a mere
recapitalization and no gain or loss is recognized therefrom. Recapitalization has
been de ned as a readjustment of existing interests in the rearrangement of the
capital structure of the company, which generally are non-taxable to both the
holders and the issuing corporation. (Mertens, Law of Federal Income Taxation,
Section 43.105, pp. 164-166)" cCAaHD

Again in BIR Ruling No. DA-318-05, the BIR citing the above ruling held as follows:
"The above-cited ruling is in line with the Supreme Court Decision entitled
'Commissioner of Internal Revenue vs. Court of Appeals, Court of Tax Appeals
and A. Soriano Corporation, G.R. No. 108576 (20 January 1999), where it was
recognized that no income was realized by the stockholders upon the
reclassi cation of common shares into preferred shares since there was no
change in the proportionate interest of the stockholders after the reclassi cation.
Both classes of stocks had the same par value. There was no cash ow and the
reclassi cation was a mere corporate paper transaction. Any difference in the
market value of the shares would be immaterial at the time of the reclassi cation
because no income was realized. There was only a modi cation of the
subscribers' rights and privileges and this was not a ow of wealth for tax
purposes.
Such being the case, when the common shares held by MR's stockholders
are granted convertibility features but without changing the stockholders'
proportionate interest and the par value of the shares and without any cash ow,
MR's stockholders will not be liable to capital gains tax."

4. No DST is due on the transfer of the real estate properties to BCDA in partial
redemption of the Preferred "B" shares pursuant to Section 189 of the Documentary
Stamp Tax Regulations which provides that the conveyance distributing in liquidation of
real estate by a corporation without valuable consideration to an owner of all its capital
stock is not subject to DST imposed under Section 196 of the 1997 Tax Code. (BIR
Ruling No. DA-318-05 dated July 15, 2005)
The surrender of the redeemable Preferred "B" shares and their cancellation or
CD Technologies Asia, Inc. © 2020 cdasiaonline.com
 retirement is not subject to DST since the surrender of the Preferred "B" shares does
not constitute a sale, assignment or transfer of said shares as FBDC is not taking title
to the surrendered shares.
5. The difference between the fair market value (FMV) as shown in the Real
Property Tax Declarations issued by the Taguig Assessor's O ce or zonal value,
whichever is higher, of the real properties received in partial redemption which is akin to
partial liquidation and the substituted cost basis of the Preferred "B" shares thus
redeemed is subject to the regular corporate income tax on the part of BCDA. This is in
accordance with Section 6 (E) of the Tax Code which provides that for purposes of
computing any internal revenue tax, the value shall be whichever is higher of the (1) the
fair market value as determined by the Commissioner, or (2) the fair market value as
shown in the schedule of values of the Provincial or City Assessor. (BIR Ruling No. 039-
02 dated November 11, 2002; BIR Ruling No. DA-482-04 dated September 10, 2004). IESDCH

The afore-quoted transfer is, however, not subject to donor's tax, as there is no
donative intent, considering that in the herein case, there is an obligation on the part of
the FBDC-issuer to redeem the shares, only that because of lack of funds or insu cient
pro ts or revenues it was allowed to convey speci c properties. In short, the potential
inability of the issuer to satisfy an obligation to redeem a preferred share for cash will
not negate the obligation. Conversely, conveyance of properties to satisfy FBDC's
financial obligation (i.e., redemption of Preferred "B" shares) where the fair market value
of the property/ies exceed the agreed redemption value, is not a taxable gift.
Accordingly, the difference between the agreed value for the redemption of the
Preferred "B" shares and the zonal value and FMV as shown in the tax declarations,
whichever is higher of the said real properties, is not a taxable donation subject to
donor's tax.
This shall serve as su cient basis for the Revenue District O cer (RDO) of
Taguig City to issue the Certi cates Authorizing Registration and Tax Clearance
Certi cates covering the real properties covered by this ruling subject to the condition
that SEC approval of the Amendment to the Articles of Incorporation of FBDC allowing
it to transfer real properties in redemption of the Preferred "B" shares owned by BCDA,
execution of the necessary Deeds of Conveyance covering such real properties and
issuance of new TCTs covering such real properties in the name of FBDC.
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.

Very truly yours,

Commissioner of Internal Revenue

(SGD.) JAMES H. ROLDAN

CD Technologies Asia, Inc. © 2020 cdasiaonline.com