Published 6 March 2023, The Daily Tribune

In adapting to an evolving competitive landscape, corporations may reorganize to rationalize business operations, reposition themselves in the market, or form an alliance with other entities. The reorganization, which usually involves the transfer of assets, business lines and manpower, entails costs and expenses for the reorganizing entity.

The National Internal Revenue Code, or NIRC, relieves the reorganizing entity from income tax and documentary stamp tax on transfers of property made pursuant to a plan of merger or consolidation.

Republic Act 11534, otherwise known as the “Corporate Recovery and Tax Incentives for Enterprises,” otherwise known as CREATE, further clarified that these transfers are likewise subject to value-added tax.

This is a recognition that transfers pursuant to mergers and consolidations are not sale and purchase transactions that transfer ownership from one person to another. Rather, the same person retains ownership over the property albeit through a different vehicle or structure. Thus, there is no transfer of beneficial ownership over the property, which would give rise to a taxable transaction.

Prior to CREATE, tax-free exchange transactions cover mergers or consolidation and transfers to controlled corporations only. In particular, Section 40 (C)(2) of the NIRC provides that no gain or loss shall be recognized if:

(1) Merger or Consolidation. In pursuant of a plan of merger or consolidation —

a. A corporation exchanges a property solely for stock in a corporation;

b. A shareholder exchanges stock in a corporation solely for the stock of another corporation;

c. A security holder of a corporation exchanges his securities in such corporation, solely for stock or securities in another corporation; and

(2) Transfer to a Controlled Corporation. Property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation, and as a result of such an exchange, the transferor, alone or together with at most four persons, gains control of such a corporation.

CREATE amended Section 40(C)(2) of the NIRC to cover reorganization as a TFE transaction. Reorganization refers to any of the following transactional structures:

a. Mergers or Consolidation. A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or

b. Acquisition of a Controlled Corporation. The acquisition by one (1) corporation, in exchange solely for all or a part of its voting stock, or in exchange solely for all or part of the voting stock of a corporation which is in control of the acquiring corporation, of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation, whether or not such acquiring corporation had control immediately before the acquisition; or

c. Acquisition of All or Substantially All of the Properties of a Corporation. The acquisition by one (1) corporation, in exchange solely for all or a part of its voting stock or in exchange solely for all or part of the voting stock of a corporation which is in control of the acquiring corporation, of substantially all of the properties of another corporation. In determining whether the exchange is solely for stock, the assumption by the acquiring corporation of liability of the others shall be disregarded; or

d. Recapitalization. A recapitalization shall mean an arrangement whereby the stock and bonds of a corporation are readjusted as to amount, income, or priority or an agreement of all stockholders and creditors to change and increase or decrease the capitalization or debts of the corporation or both; or

e. Reincorporation. A reincorporation shall mean the formation of the same corporate business with the same assets and the same stockholders surviving under a new charter. Transfers to a controlled corporation are still considered a TFE transaction under CREATE.

For purposes of determining whether a transaction is considered TFE, “control” means ownership of stocks possessing at least 51 percent of the total voting power of all classes of stocks entitled to vote.

Thus, with CREATE, corporations are given more freedom to structure their reorganizational projects, and also an assurance that the transaction will not be subject to VAT. In the next article, I will discuss the processes required in availing of tax exemption.

(To be continued)

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