February 5, 2004

BIR RULING [DA-046-04]

S. 24
DA-221-02/11-25-02

SGV & Co.

6760 Ayala Avenue
Makati City

Attention: E. C. Alcantara
Tax Division

Gentlemen :

This refers to your letter dated October 29, 2003 requesting on behalf
of your client, JHN Holding Company, Inc., (JHN for brevity), for a
confirmation of your opinion that the additional capital contributions of
stockholders of JHN through the transfer of shares of stock in various
domestic corporations in favor of JHN, without the necessity of issuing
additional shares of stock is deemed capital investment which is not included
within the purview of the term "taxable income" and is not subject to the
income tax, donors tax and documentary stamp tax.
The facts, as you represent, are as follows:
JHN is a corporation duly organized and existing under and by virtue of
the laws of the Republic of the Philippines, with principal office at ODC
Building, Salcedo St., Legaspi Village, Makati City. It is a holding company
organized primarily for the purpose of investing in, holding, purchasing,
acquiring, leasing, contracting or otherwise dealing in, within the limits
allowed by law, any and all real and personal properties of every kind and
description and to do every act and thing covered generally and normally by
the term "holding company", with an authorized capital stock of
P335,600,000, Philippine Currency, divided into 3,356,000 common shares
of par value of P100 per share.
Mary June Wong and Linda Ng-Kawsek are the registered stockholders
of JHN and various domestic corporations known as the Makati Supermarket
Group (MSG for brevity). The total aggregate par value of the MSG shares
registered in the names of Mary June Wong and Linda Ng-Kawsek amounts to
Twenty Million Three Hundred Ninety Nine Thousand Six Hundred Pesos
(P20,399,600.00).
By virtue of the corporate reorganization of JHN, and in order to
provide additional funds as operating capital of JHN, Mary June Wong and
Linda Ng-Kawsek executed a Deed of Assignment dated October 23, 2003
and contributed their respective MSG shares in favor of JHN, without the
issuance of additional shares by JHN. The capital contribution of Mary June
CD Technologies Asia, Inc. © 2021 cdasiaonline.com
 Wong and Linda Ng-Kawsek to JHN's capital account shall be in the form of
paid-in surplus and recorded as Additional Paid-in Capital in the books of
JHN. After the contribution of the shares to JHN, the existing stockholder's of
record of the corporation shall maintain their proportionate shareholdings in
JHN.
The capital structure of JHN before and after the transfer of shares may
be illustrated as follows:
Stockholders Before the Transfer of After the Transfer of
Shares in MSG Shares in MSG

Percentage Percentage
Equity Equity Value of
of of
Ownership Ownership Premium

Joseph Henry Ng 2 00% 2 00% 2,914,228.57

Pacita O. Ng 3 00% 3 00% 2,914,228.57
Peter T. Ng 405,049 40% 405,049 40% 2,914,228.57
Josephine N. Lo 162,022 16% 162,022 16% 2,914,228.57
Christine Chuang 162,022 16% 162,022 16% 2,914,228.57
Linda Ng Kawsek 141,769 14% 141,769 14% 2,914,228.57
Mary June Wong 141,769 14% 141,769 14% 2,914,228.57
Total 1,012,636 100% 1,012,636 100% P20,399,600.00
Notwithstanding the capital contribution, there will result no change in
the proportionate equity shareholdings of the seven (7) stockholders since
JHN will not issue shares of stock in favor of the transferors as consideration
for the transfer of the MSG shares. Instead the value of the shares
transferred shall be recorded as Additional Paid-In Capital in the books of
JHN.
In reply, please be informed that in BIR Ruling DA-221-02 dated
November 25, 2002, this Office ruled that:
". . . where a corporation requires additional funds for
conducting its business and obtains said funds through voluntary
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.

Corollarily, in BIR Ruling No. 586-88 dated December 19, 1988,

this Office had the occasion to rule that the additional contribution in
the form of donated surplus without the necessity of issuing
additional shares of stock is deemed capital investment which is not
included within the purview of the term "taxable income" and is not
subject to income tax. In another occasion, this Office ruled that
additional capital contribution without necessarily issuing additional
shares of stock, which merely increase the basis of the stockholders'
stock but not their proportionate equity in the corporation, is a
CD Technologies Asia, Inc. © 2021 cdasiaonline.com
 transaction not subject to income or gift taxes. (BIR Ruling Nos. 270-
87 dated September 8, 1987; 127-89 dated June 13, 1989)
Accordingly, the infusion of APIC by US Filter into Vivendi-Phils,
is in the nature of additional funds which will be used as, and forms
part of, the latter's working capital for which no corresponding shares
of stock will be issued. As such, the APIC does not constitute an
income on the part of Vivendi-Phils.

Considering that the infusion of the APIC will not result in the
issuance of shares of stock by Vivendi-Phils., the same shall not be
subject to documentary stamp tax imposed under Section 175 of the
Tax Code of 1997." (Emphasis supplied.)

Accordingly, no taxable gain or loss shall be recognized both to the

transferor and the transferee on the transfer by the individual stockholders
of their shares of stock in favor of JHN since the transfers were made as
capital contributions in JHN whereby the transferees in the transfer of the
shares to JHN do not realize taxable income and therefore are not subject to
Philippine income tax.
Moreover, the capital infusion shall effect no change in the equity
shareholdings of the stockholders of JHN. The transfer will merely increase
the basis of the stockholders' stock but not their proportionate equity in the
corporation. Hence, the transaction not subject to income or gift taxes. AHDacC

Finally, considering that the infusion of the APIC will not result in the
issuance of shares of stock by JHN, the same shall not be subject to
documentary stamp tax imposed under Section 175 of the Tax Code of
1997. However, the transfer of the subject shares of stocks to JHN shall be
subject to documentary stamp tax under Section 176 of the 1997 Tax Code.
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 void.

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JOSE MARIO C. BUÑAG

Deputy Commissioner
Legal & Inspection Group

CD Technologies Asia, Inc. © 2021 cdasiaonline.com