July 5, 2019

BIR RULING NO. 377-19

Sec. 40 (C) (2) & (6) (c), Tax Code; 000-00

R.G. Manabat & Co.

9F The KPMG Center
6787 Ayala Avenue
Makati City

Attention: AAA
_______________

Gentlemen :

This refers to your letter dated December 22, 2011, requesting on behalf of CHARTIS
SINGAPORE INSURANCE PTE. LTD. (CSI), for confirmation that the transfer of shares of
stock of Chartis Philippines Insurance, Inc. (CP) by a nonresident foreign corporation to
another nonresident foreign corporation by way of property dividend and capital contribution
is not subject to Philippine income taxes, including capital gains tax. AcICHD

As represented, Chartis Overseas Limited (COL) is a corporation incorporated

under the laws of Bermuda with registered address at Chartis Building, 29 Richmond Road,
Pembroke HM08, Bermuda. As of June 1, 2009, it is the owner of 5,810,567 shares
including beneficial ownership of nine (9) shares issued to nominee directors in Chartis
Philippines Insurance, Inc. (CP) with an aggregate book value of PhP_______________. CP
is a domestic corporation duly registered and validly existing under Philippine laws.

Chartis International, LLC (CIL) is a limited liability company incorporated under

the laws of the United States of America with registered address at 175 Water Street, New
York, New York 10038. It is the registered owner of 547,957 shares of stock in CP with an
aggregate book value of PhP_______________ as of March 8, 2010. It is the sole
stockholder of COL.

Chartis Asia Pacific Pte. Ltd. (CAP) is a company incorporated in Singapore with
registered address at 78 Shenton Way, Chartis Building #11-16, Singapore 079120. It is
100% owned by CIL.
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 Chartis Singapore Insurance Pte. Ltd. (CSI) is a company incorporated in
Singapore with registered address at 78 Shenton Way, Chartis Building #09-16, Singapore
079120. It is 100% owned by CAP.

In connection with the restructuring of the business operations of Chartis Group in the
Asia Pacific Region, it was decided that the ownership in CP would be transferred to CSI,
which would, in turn, infuse capital to CP. Hence, on December 1, 2011, the following
transactions were undertaken:

1. COL, by way of property dividend, transferred all its interest in the

5,810,567 CP to its sole stockholder, CIL. This increased the
shareholding of CIL in CP to 6,358,524 shares with an aggregate book
value of PhP_______________.

2. CIL transferred, conveyed and assigned all its interest in the 6,358,524
CP shares to CAP in exchange for 53,089,018 ordinary shares of the latter
(CAP shares) at an issue price of SGD_____ per share or for a total issue
price of SGD_______________, credited as fully paid up. Using the
exchange rate of PhP34.0455157788 to 1 SGD, the total issue price
amounts to PhP_______________. As a result of the exchange, CIL
maintained its 100% ownership of CAP.

3. CAP then transferred the 6,358,524 CP shares to CSI in exchange for

53,089,018 ordinary shares of the latter (CSI shares) at an issue price of
SGD_____ per share or for a total issue price of SGD_______________,
credited as fully paid up. Using the exchange rate of PhP34.0455157788
to 1 SGD, the total issue price amounts to PhP_______________. As a
result of the exchange, CAP maintained its 100% ownership of CSI.

Based on the foregoing, you now request confirmation of your opinion that:

1. The transfer of CP shares by COL to CIL as property dividend is not

subject to Philippine income taxes including capital gains tax, either on
the part of COL or CIL. It is, however, subject to documentary stamp tax
(DST) under Section 176 of the 1997 Tax Code at the rate of PhP0.75 on
each PhP200.00 or fractional part thereof, of the par value of the CP
shares transferred. TAIaHE

2. The transfer of CP shares by CIL to CAP in exchange for CAP shares,

and the subsequent transfer of the same shares by CAP to CSI in
exchange for CSI shares, qualify as tax-free exchange under Section 40
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 (C) (2) and (6) (c) of the 1997 Tax Code. Consequently,

a. No gain or loss shall be recognized on the transfer of the CP shares

by CIL to CAP and by CAP to CSI;

b. The basis of the CAP shares received by CIL shall be the same as
the basis of the CP shares exchanged; and the basis of the CP
shares of stock transferred shall be the same as it would be in the
hands of CIL;

c. The basis of the CSI shares received by CAP shall be the same as
the basis of the CP shares exchanged and the basis of the CP shares
transferred shall be the same as it would be in the hands of CAP;

d. The transfer of CP shares by CIL to CAP and by CAP to CSI are

not subject to value-added tax (VAT);

e. The transfer of CP shares by CIL to CAP and by CAP to CSI are

not subject to donor's tax; and

f. The transfer of CP shares by CIL to CAP and by CAP to CSI are

not subject to documentary stamp tax (DST) under Section 199
(m) of the 1997 Tax Code.

3. Upon presentation of the BIR Ruling confirming the above, the Corporate
Secretary of CP be authorized to record the transfer of the CP shares by
COL to CIL, by CIL to CAP and by CAP to CSI in the Stock and
Transfer Books of CP, and to issue new stock certificates in the name of
CSI as the ultimate transferee.

In reply, please be informed as follows:

Transfer of CP shares by
way of property dividend

Section 23 (F) of the 1997 Tax Code, as amended, provides that a foreign corporation,
whether engaged or not in trade or business in the Philippines, is taxable only on income
derived from sources within the Philippines. On the other hand, Section 42 (A) (2) (b) of the
same Code provides that dividends shall be treated as gross income from sources within the
Philippines unless less than fifty percent (50%) of the gross income of such foreign
corporation for the three-year period ending with the close of its taxable year preceding the
declaration of such dividends (or for such part of such period as the corporation has been in

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existence) was derived from sources within the Philippines.

COL is an insurance company based in Bermuda with no office or branch in the

Philippines. Based on its audited financial statements, its income consists mainly of
premiums earned and investments income. Considering that COL is not engaged in
insurance business in the Philippines, the premiums earned are deemed income from sources
outside the Philippines. On the other hand, out of its total investments income, only about
12% comes from investments in its affiliates. Thus, even assuming all investment income
from affiliates came from the Philippines, such income is still less than 50% of its total
income.

Consequently, the property dividend that CIL received from COL in 2011 is income
from sources without the Philippines, thus, not subject to Philippine income tax. cDHAES

Likewise, the transfer of the CP shares by way of property dividend is not deemed a
sale or disposition of shares of stock within the meaning of Section 40 of the Tax Code, as
amended because COL did not receive any consideration and did not realize any income
from the said transfer. Hence, COL is not subject to capital gains tax on the said transfer of
the CP shares.

Transfer of CP shares
as capital contribution

Income Tax

CIL, CAP and CSI are nonresident foreign corporations. The application of Section
40 (C) (2) of the 1997 Tax Code, as amended, to nonresident foreign corporation is
well-settled.

Section 40 (C) (2) of the 1997 Tax Code does not make any qualification or
distinction as to its application to a corporation. It provides that —

"No gain or loss shall also be recognized if property is transferred to a

corporation by a person in exchange for stock or unit of participation in such a
corporation of which as a result of such exchange such person, alone or together with
others, not exceeding four (4) persons gains control of the said corporation: Provided,
that stocks issued for services shall not be considered as issued in return for property."

The underlying assumption of tax-free exchange provisions generally is that the new
property received is substantially a continuation of the old investment still unliquidated. (BIR
Ruling No. 024-05 dated December 23, 2005)

Based on the foregoing and considering that after the exchange CIL continues to own
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the entire capital stock of CAP, the transfer of the CP shares from CIL to CAP qualifies as a
tax-free exchange transaction.

In the same manner, the subsequent transfer of the same CP shares by CAP to CSI
qualifies as a tax free exchange transaction because as a result of the exchange, CAP
continues to own the entire capital stock of CSI.

Accordingly, no gain or loss shall be recognized on the transfer of the CP shares by

CIL to CAP in exchange for the latter's 53,089,018 shares of stock. In the same vein, no gain
or loss shall be recognized on the subsequent transfer of the CP shares from CAP to CSI in
exchange for the 53,089,018 shares of stock of the latter.

However, it is to be emphasized that Section 40 (C) (2) and (6) (c) of the 1997 Tax
Code, as amended, merely defers recognition of the gain or loss from such transaction, for in
determining the gain or loss from a subsequent transaction of the properties or of the stocks
involved in the exchange, the original or historical cost of the properties or stocks is
considered. Thus, if the transferor later sells or exchanges the shares of stock it acquired 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 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 40 (C) (5), 1997 Tax Code, as
amended)

Cost Basis

Section 40 (C) (5) (a) and (b) of the 1997 Tax Code, as amended, states:

"(5) Basis. —

"(a) The basis of the stock or securities received by the transferor upon the
exchange specified in the above exception shall be the same as the basis
of the property, stock or securities exchanged, decreased by (1) the
money received, and (2) the fair market value of the other property
received, and increased by (a) the amount treated as dividend of the
shareholder and (b) the amount of any gain that was recognized on the
exchange: Provided, That the property received as 'boot' shall have as
basis its fair market value: Provided, further, That if as part of the
consideration to the transferor, the transferee of property assumes a
liability of the transferor or acquires from the latter property subject to a
liability, such assumption or acquisition (in the amount of the liability)
shall, for purposes of this paragraph, be treated as money received by the
transferor on the exchange: Provided, finally, That if the transferor
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 receives several kinds of stock or securities, the Commissioner is hereby
authorized to allocate the basis among the several classes of stocks or
securities.ASEcHI

"(b) The basis of the property transferred in the hands of the transferee shall
be the same as it would be in the hands of the transferor increased by the
amount of the gain recognized to the transferor on the transfer."

Indubitably, the basis of the CAP shares received by CIL upon exchange shall be the
same as the basis of the CP shares exchanged; and the basis of the CP shares transferred
shall be the same as it would be in the hands of CIL. Likewise, the basis of the CSI shares
received by CAP upon the exchange shall be the same as the basis of the CP shares
exchanged; and the basis of the CP shares transferred shall be the same as it would be in the
hands of CAP.

Thus, CIL transferred 6,358,524 CP shares with a total book value of

PhP_______________ to CAP, as consideration for the transfer of the CP shares, CAP
issued to CIL 53,089,018 ordinary CAP shares at an issue price of _____ SGD per share or a
total of SGD_______________. Converted to Philippine peso, this amounts to
PhP_______________, which is equivalent to the total book value of the CP shares
transferred.

Subsequently, CAP transferred the 6,358,524 CP shares with an aggregate book value
of PhP_______________ to CSI. As consideration for the transfer of the CP shares, CSI
issued to CAP 53,089,018 ordinary CSI shares at an issue price of SGD_____ per share or a
total of SGD_______________. Converted to Philippine Peso, this amounts to
PhP_______________, which is equivalent to the total book value of the CP shares
transferred.

Value-Added Tax (VAT)

Section 106 of the 1997 Tax Code, as amended, states:

"Sec. 106. Value-Added Tax on Sale of Goods or Properties. —

(A) Rate and Base of Tax. — There shall be levied, assessed and collected on every
sale, barter or exchange of goods or properties, a value-added tax equivalent to
ten percent of the gross selling price or gross value in money of the goods or
properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor: Provided, That the President upon the recommendation of the
Secretary of Finance, shall effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%). . ."

Corollarily, Section 4.106-8 of Revenue Regulations (RR) No. 16-2005, as amended,

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provides:

"(a) Subject to output tax

The VAT provided for in Sec. 106 of the Tax Code shall apply to goods or
properties originally intended for sale or use in business, and capital goods
which are existing as of the occurrence of the following. . .

xxx xxx xxx

(b) Not subject to output tax

The VAT shall not apply to goods or properties existing as of the occurrence of
the following:

(1) Change of control of a corporation by the acquisition of the controlling

interest of such corporation by another stockholder or group of
stockholders. The goods or properties used in business or those
comprising the stock-in-trade of the corporation, having a change in
corporate control, will not be considered sold, bartered or exchanged
despite the change in the ownership interest in the said corporation."
(Underscoring supplied.)

Considering that the CP shares are not held primarily for sale, barter or exchange in
the ordinary course of its trade or business, the transfer by CIL to CAP and the subsequent
transfer of the same shares from CAP to CSI are not subject to 12% value-added tax. (BIR
Ruling No. 024-05 dated December 23, 2005) ITAaHc

Donor's Tax

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 CIL or CAP to donate the CP shares since
the transaction is being undertaken purely for business purposes, i.e., restructuring of the
business operations of Chartis Group in the Asia Pacific Region. Hence, the transfers of the
CP shares by CIL to CAP and by CAP to CSI are not subject to donor's tax.

Documentary Stamp Tax

Section 199 (m) of the Tax Code of 1997, as amended by R.A. No. 9243 and as
implemented by Revenue Regulations (RR) No. 13-2004, states as follows:

"Sec. 199. Documents and Papers Not Subject to Stamp Tax. — The provision of
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 Section 173 to the contrary notwithstanding, the following instruments, documents and
papers shall be exempt from the documentary stamp tax:

xxx xxx xxx

(m) Transfer of property pursuant to Section 40 (c) (2) of the National Internal
Revenue Code of 1997, as amended."

Considering that the transfer of the CP shares by CIL to CAP and by CAP to CSI
qualifies as a tax-free exchange transaction under Section 40 (c) (2) of the 1997 Tax Code,
as amended, the said transfer is exempt from DST.

Strict compliance of requirements

to avail non-recognition of gains
provided for in Section 40 (C) (2)
and (6) (c) of the Tax Code

In order that the parties to the exchange can avail of the non-recognition of gains
provided for in Section 40 (C) (2) and (6) (c) of the Tax Code of 1997, as amended, they
should comply with the requirements hereunder mentioned.

The parties shall, pursuant to Section 58 (E) of the Tax Code of 1997, as amended,
cause the Corporate Secretary to annotate at the back of the Certificates of Stock, the date
the Deed of Assignment was executed, the original or historical cost of acquisition of the
shares of stock involved, and the fact that no gain or loss was recognized as a result of such
exchange; provided however, that any violation by the Corporate Secretary of this condition
shall be penalized under Section 269 of the same Code.

It is further required that the Certificate of Shares of Stock that bears the annotation of
substituted bases of the shares of stock transferred/received in connection with this
transaction, as duly certified by the Corporate Secretary, should be submitted to the Law and
Legislative Division, Bureau of Internal Revenue, 7/F National Office Building, Diliman,
Quezon City within ninety (90) days from the date of the receipt of this Certification, by any
of the parties to the exchange transaction. Otherwise, this ruling shall be void and without
effect, and the Chief, Law and Legislative Division shall refer the docket of the case to the
Prosecution Division for appropriate action. CHTAIc

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be ascertained that the facts are different, then this
ruling shall be considered null and void.

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 Very truly yours,

(SGD.) CAESAR R. DULAY

Commissioner of Internal Revenue

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