02-23-2005 BIR Ruling [DA-065-05]

February 23, 2005

BIR RULING [DA-065-05]

APIC DA-139-2004

Rural Bank of Rosales, Inc. (ROSBANK)

Rizal Street, Poblacion, Rosales, Pangasinan

Attention: Mr. Andres M. Cornejo

Chairman & CEO

Gentlemen :

This refers to your letter dated February 2, 2004 requesting for a ruling that the transfer of real
properties by the Spouses Condrado and Sergia Estrella in favor of Rural Bank of Rosales, Inc. (ROSBANK)
representing additional infusion of capital in the nature of paid-in surplus is not subject to the capital
gains tax imposed under Section 24 of the Tax Code of 1997. IHEAcC

Documents submitted disclosed that ROSBANK is a domestic corporation duly registered with the
Securities and Exchange Commission; that on October, 31, 2002, Spouses Condrado and Sergia Estrella
executed two (2) separate Deed of Conveyance, whereby they transferred to ROSBANK two (2) parcels
of land located in Rosales, Pangasinan; that on the same date, Sergia Estrella executed a Deed of
Conveyance whereby she transferred to ROSBANK her paraphernal property also located in Rosales,
Pangasinan; unit the corresponding fair market value/appraised value of the aforementioned properties
are as follows:

Property Area & value per sq.m. Valuation

A) Paraphernal Property of Sergia Estrella

TCT No. 21172 4,871 sq.m. @ P3,000/sq.m. P14,613,000.00

B) Conjugal Property of Spouses Estrella

TCT No. 37196 13,910 sq.m. @ P2,000/sq.m. 27,820,000.00

TCT No. 36556}

TCT No. 36557} 2,392 sq.m. @ P3,000/sq.m. 7,176,000.00

TCT No. 36558} –––––––––––

P49,609,000.00
 ===========

that the above-listed properties were transferred to ROSBANK as additional consideration in the nature
of paid-in surplus for the existing shares of stock issued to Spouses Condrado and Sergia Estrella; that by
virtue of said transfer of realties, the book value of the shares of stock owned by Condrado and Sergia
Estrella shall be increased accordingly; and that since the transfer of the above properties represents
additional infusion of capital in the nature of paid-in surplus, no shares shall be issued by ROSBANK to
Condrado and Sergia Estrella. CHIScD

In reply, please be informed that under Section 24(D)(1) of the Tax Code of 1997, a final tax of six
percent (6%) based on the gross selling price or current fair market value as determined in accordance
with Section 6(E) of the same Code, whichever is higher, is imposed upon capital gains presumed to
have been realized from the sale, exchange, or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional
sales, by individuals, including estates and trusts. The 6% final tax is still imposed despite the fact that a
transfer of property is made for a legitimate business purpose and without monetary consideration. 1
This is so because the foregoing tax is based on the capital gains presumed to have been realized by the
taxpayer on the said transfer transaction. Such being the case, the transfer of the above-listed real
properties to ROSBANK by stockholders Condrado and Sergia Estrella, as contribution to its capital, is
subject to the 6% capital gains tax herein imposed.

On the other hand, Section 56 of Revenue Regulations No. 2, otherwise known as the "Income Tax
Regulations" reads —

"Sec. 56. Contributions by shareholders. — Where a corporation requires additional funds for
conducting its business and obtains such needed money through voluntary process payments by its
shareholders, the amounts so received being credited to its surplus account or to a special capital
account, will not be considered income, although there is no increase in the outstanding shares of stock
of the corporation. The payments in such circumstances are in the nature of voluntary assessments
upon, and represent an additional price paid for, in shares of stock held by the individual shareholders,
and will be treated as an addition to and as part of the operating capital of the company."

Consequently, the fair market value of the above realties transferred, as so appraised, being credited to
the surplus account of ROSBANK (i.e., additional paid-in capital) being a capital investment, is not within
the purview of the term "taxable income" as defined in Section 32 of the Tax Code of 1997. Accordingly,
the transfer of the above-listed real properties to ROSBANK by stockholders Condrado and Sergia
Estrella, as their contribution to its capital, should not be treated as income on the part of the latter,
thus, not subject to income tax. (BIR Ruling No. DA-221-02 dated November 25, 2002, cited in BIR Ruling
Nos. DA-117-03 dated April 14, 2003 and DA-139-2004 dated March 26, 2004) CSaHDT

Finally, Section 185 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax
Regulations" provides that —
"Sec. 185. Conveyances without consideration. — Conveyances of realty not in connection with a
sale, to trustees or other persons without consideration are not taxable."

Considering that Condrado and Sergia Estrella transferred the above-listed real properties without the
corresponding issuance of additional shares of stock in their favor, the foregoing will be considered as
contribution of additional paid-in capital, not subject to documentary stamp tax as the above
conveyances of realties are without any consideration and are not made in connection with a sale. (DA-
139-2004 dated March 26, 2004 citing DA-150-03 dated May 7, 2003)

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. cTDECH

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JOSE MARIO C. BUÑAG

Deputy Commissioner

Legal and Inspection Group

Footnotes

1. Except those transactions specified as exempt under the Tax Code.

C o p y r i g h t 2 0 0 8 C D T e c h n o l o g i e s A s i a, I n c.

02-23-2005 BIR Ruling [DA-064-05]