Special InTAX: November 2020 Issue 3 | Volume 1

InTAX is an official publication of R.G. Manabat & Co.'s Tax Group

InTAX is an official publication of R.G. Manabat & Co.'s Tax Group

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special intax

Bureau of Internal Revenue


The Bureau of Internal Revenue (BIR) issued BIR Ruling S40M-0635-2020, 17 November 2020, Greenhills Properties, Inc. (GPI) and Lochinver Assets, Inc. (LAI), a wholly-owned subsidiary of GPI that executed a Plan of Merger dated 26 April 2012. Under the Plan of Merger, LAI will be the absorbed corporation, while GPI ais the surviving corporation. Upon approval of the Securities and Exchange Commission (SEC) of the Articles and Plan of Merger on 28 November 2012, GPI issued shares to the shareholders of LAI which shares are composed of unissued authorized capital stock of GPI.

The BIR confirmed the following:       

1. The merger is a tax-free merger under Section 40 (C)(2)(a) and 40(C)(6)(b) of the Tax Code, as amended, because GPI will acquire all of the assets and assume all of LAI’s liabilities for the purpose of achieving economies of scale, efficiency in operations and use of its properties for the ultimate benefit of their respective shareholders. The BIR concluded that the merger is being undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation.

The merger of GPI and LAI qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 40 (C)(2) of the Tax Code, as amended, that no gain or loss shall be recognized by LAI, as the transferor of all assets and liabilities, to GPI pursuant to the Plan of Merger.

No gain or loss shall also be recognized by GPI as the transferee, upon receipt of the assets and liabilities of LAI pursuant to and as a consequence of the merger.

The BIR ruled that the basis of the properties transferred in the hands of GPI shall be the same as if in the hands of the transferor increased by the amount of the gain, if any, recognized by the transferor (LAI) on the transfer.

The basis of the shares of stocks received by the transferor (LAI) upon the exchange shall also be the same basis of the properties, stocks and securities exchanged, decreased by (1) the money received, (2) the fair market value of the other property received and increased by (a) the amount treated as dividends of the shareholders and (b) the amount of gain recognized on the exchange.

Should the amount of liabilities assumed and the amount of liabilities which the property is subject to exceed the total of the adjusted basis of the properties transferred from the exchange, such excess shall be considered as a gain on the part of the transferor from the sale or exchange of a capital asset or properties not classified as a capital asset, as applicable.

The substituted basis of the properties transferred by LAI to GPI should align with the rule that cash and other cash items will be excluded from the adjusted basis of the properties transferred to determining whether the liabilities assumed and to which the property is subject to do not exceed the adjusted basis of the property transferred.

2. The merger transaction is not subject to VAT. Any unused input VAT of LAI, as of the effective date of the merger will be transferred to and absorbed by GPI.

3. The merger is not subject to donor’s tax since there is no intention to donate and the transaction is a bona fide merger effected solely for business purpose.

4. There is no DST due on the transfer of assets as mentioned in Section 199 (m) in relation to Section 40(C)(2) of the Tax Code, as amended.

5. Any CWT which form part of the assets to be transferred by LAI as of the effectivity of the merger, shall be transferred to GPI and may be utilized by GPI.

6. DST shall be imposed on the original issuance of shares by GPI to the stockholders of LAI as a consequence of the merger under Section 174 of the Tax Code, as amended.

7. The available NOLCO is not considered as one of LAI’s assets which can be transferred and absorbed by GPI since it can be availed by LAI only.

8. The excess and unexpired MCIT of LAI shall be carried forward and credited against the normal corporate income tax of GPI for the 3 immediately succeeding taxable years.

9. The retained earnings of LAI is subject to 10% FWT on dividends constructively received by its individual shareholders pursuant to Section 24(B)(2) of the Tax Code, as amended. 

For the transaction to be considered as tax free-merger under Section 40 (C)(2)(a) and 40(C)(6)(b) of the Tax Code, as amended, the parties to the merger should comply with all the requirements provided under Revenue Regulations No. 18-2001.

Attached is the full text of the BIR Ruling.

111720 - BIR Ruling S40M-0635-2020


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