August 22, 2008

BIR RULING [DA-(C-046) 166-08]

DA318-05

Aranas Consunji Barleta

Unit 106 G/F Le Metropole Building
Tordesillas cor. De La Costa Street
Salcedo Village, Makati City

Attention: Atty. Casey M. Barleta

Gentlemen :

This refers to your letter dated July 21, 2008 stating that your client, Sumifru
Singapore Pte. Ltd. (SFS), is a non-resident foreign corporation duly organized and
existing under the laws of Singapore with office address at 3 Phillip Street #08-04
Commerce Point Singapore; that on the other hand, Davao Fruits Corporation (DFC)
is a domestic corporation duly organized and existing under the laws of the
Philippines with principal office address at AMS Compound, F. Torres Street, Davao
City; that DFC is engaged in the production and exportation of Cavendish bananas
through contract growing in the Philippines; that DFC's present capital structure
consists of the following:

Class/Series of Shares Issued Shares Par Value per Share

Preferred 7,000 P100,000.00
Common 37,094,370 10.00

that SFS holds 7,000 redeemable preferred shares of DFC; that the foregoing 7,000
redeemable shares held by SFS will be converted into 700,000,000 common shares
with a par value of P1.00; and that DFC shall issue common shares equal the total par
value of the preferred shares redeemed.

Based on the foregoing representations, you now request for confirmation of

your opinion that —

1. The conversion of DFC preferred shares to common shares is not

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 tantamount to redemption but is in the nature of a mere recapitalization
to which no gain or loss is recognized. Thus, the said conversion is not
subject to capital gains tax;

2. SFS will not be subject to any tax on the conversion of its DFC
preferred shares to common shares because SFS merely changed the
form of its shareholdings in DFC and there was no change of its
proportionate interest in DFC; and

3. The conversion of preferred shares to common shares by DFC is not

subject to documentary stamp tax as the said conversion does not
partake of the issuance of original shares of stock subject to
documentary stamp tax under Section 174 of the Tax Code of 1997, as
amended. DTaSIc

In reply thereto, please be informed that your opinion is hereby confirm as

follows —

1. The conversion/reclassification of DFC's redeemable preferred shares to

common shares is not subject to capital gains tax as the said reclassification or
conversion is not tantamount to redemption from which capital gain or loss may be
recognized.

This is fortified in BIR Ruling No. DA030-05 dated January 24, 2005, where
this Office ruled 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 benefit therefrom. (BIR Ruling No.
DA141-99 dated March 9, 1999)

The exchange of common shares into preferred shares qualifies as a

mere recapitalization and no gain or loss is recognized therefrom.
Recapitalization has been defined 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)"

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
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 recognized that no income was realized by the stockholders upon the reclassification
of common shares into preferred shares since there was no change in the
proportionate interest of the stockholders are the reclassification. Both classes of
stocks had the same par value. There was no cash flow and the reclassification was a
mere corporate paper transaction. Any difference in the market value of the shares
would be immaterial at the time of the reclassification because no income was
realized. There was only a modification of the subscribers' rights and privileges and
this was not a flow of wealth for tax purposes.

Thus, in applying the above-cited ruling together with the Supreme Court
decision in the instant case, it is undisputed that SFS will only change the form of its
shareholdings in DFC through the conversion of its preferred shares to common
shares. Accordingly, SFS is deemed not to have realized any gain or economic benefit
from the said conversion.

2. SFS does not realize any income from the conversion of DFC preferred
shares to common shares since the transaction will not involve any cash flow and will
not change the par value of the shares and the stockholder's proportionate interest in
DFC. In other words, the total value of the issued/subscribed capital stock, after
conversion, will remain the same since only the type of shares issued will change. DcSTaC

Consequently, SFS will not be subject to any tax on the conversion of its DFC
preferred shares to common shares because SFS merely changed the form of its
shareholdings in DFC and without any change in its proportionate interest in DFC.

3. In BIR Ruling No. DA318-05, supra, it was likewise ruled that the
conversion of the preferred shares into equivalent common shares does not partake of
the issuance of original shares of stock and, hence, the same is not subject to
documentary stamp tax under Section 175 of the Tax Code of 1997.

Such being the case, the conversion of preferred shares to common shares by
DFC is not subject to the documentary stamp tax prescribed under Section 175 of the
Tax Code of 1997, as amended by R.A. No. 9243, as implemented by Revenue
Regulations No. 13-2004.

WHEREFORE, in view of the foregoing, this Office hereby confirms your

opinion that —

1. The conversion/reclassification of preferred shares to common shares by

DFC is not tantamount to redemption but is in the nature of a mere recapitalization to
which no gain or loss is recognized. Thus, the said conversion is not subject to capital
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 gains tax.

2. SFS will not be subject to any tax on the conversion of its DFC preferred
shares to common shares because SFS merely changed the form of its shareholdings
in DFC and there was no change of its proportionate interest in DFC.

3. Finally, the conversion of preferred shares to common shares by DFC is

not subject to documentary stamp tax as the said conversion does not partake of the
issuance of original shares of stock prescribed in Section 175 of the Tax Code of
1997, as amended by R.A. No. 9243. AHCaED

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,

(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service
Bureau of Internal Revenue

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