In a ruling dated 17 February, the Bureau of Internal Revenue issued a tax opinion on the tax implications of mergers of non-resident foreign corporations and the effect on the shareholdings of the subsidiary corporations registered in the Philippines.
In this case, Lenovo U.A. and Lenovo B.V. concluded a legal merger within the meaning of Chapters 1, 2, and 3 of Title 7 of Book 2 Netherlands Civil Code, whereby Lenovo U.A. acquired all the assets and liabilities of Lenovo B.V. As a result, Lenovo U.A., as the surviving corporation acquired the shareholdings of Lenovo B.V. in Think Server, a corporation organized and existing under the laws of the Philippines.
As part of the ruling, the BIR discussed whether Capital Gains Tax/Income Tax, Value-Added Tax or VAT, Donor’s Tax, and Documentary Stamp Tax or DST were applicable.
In its ruling, the BIR found that the merger was being undertaken for a bona fide business purpose as a matter of strategic management to consolidate ownership of the companies’ assets and liabilities and not to escape the tax burden. Thus, it was a merger as defined under Section 40(6)(b) of the National Internal Revenue Code, as amended, and qualified for non-recognition of gain or loss for income tax purposes in accordance with Section 40(C)(2) of the same law.
The BIR also applied Section 105 of the Tax Code and held that the transfer of Think Server shares was not made in the course of business but by operation of law, hence, the transaction was not subject to VAT.
Additionally, the BIR discussed the essential elements of donation to determine if the said transaction was subject to Donor’s Tax. In ruling that the parties were not liable for Donor’s Tax, the BIR pointed out that in mergers, there is no intention to donate since it is undertaken purely for business purposes.
The BIR further ruled that no DST was due on the transaction because Sec. 199 (m) of the Tax Code exempts from the DST transactions falling under Sec. 40(C)(2). Additionally, the BIR explained that the issuance of shares by Lenovo U.A. in exchange for the assets and liabilities of Lenovo B.V. was still not taxable because Lenovo U.A. is a corporation organized and existing under the laws of the Netherlands, therefore, not within the Philippine taxing jurisdiction. Section 173 of the Tax Code only imposes the DST on obligations or rights arising from Philippine sources or properties situated in the Philippines.
Lastly, the BIR emphasized the strict compliance of requirements to avail of the non-recognition of gains provided for in Section 40(C)(2) of the Tax Code which are:
• The parties shall cause the corporate secretary of Think Server to annotate at the back of the Certificate of Stock the date the merger was executed;
• The original or historical cost of acquisition of the shares of stock involved;
• The fact that no gain or loss was recognized as a result of such merger; and
• After which, the Certificate of Stocks that bear the annotation of substituted bases of the shares of stock transferred/received in connection with the said ruling should be submitted to the Law and Legislative Division of the BIR within 90 days from the date of the receipt of this ruling.
Section 40(C)(2) of the Tax Code, as amended, addresses a situation where there may be a gain or loss from the exchange of property but because of certain circumstances, the recognition of such gain or loss is deferred.