QuestionsQuestions (Republic Act No. 4522)
To exempt, under certain conditions, property exchanges for stocks in corporations from the recognition of gain or loss (i.e., tax gain/loss determination), by amending specific provisions of the NIRC.
No gain or loss is recognized if, under the plan, (a) a party corporation exchanges property solely for stock in a party corporation; (b) a shareholder exchanges stock in a party corporation solely for stock of another party corporation; or (c) a security holder exchanges securities in a party corporation solely for stock or securities in another party corporation.
No gain or loss is recognized if a person exchanges property for stock in a corporation such that, as a result of the exchange, the person alone or together with others does not exceed four persons and gains control of the corporation.
Ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote.
Gain is recognized (but not loss) up to the amount of the money received plus the fair market value (FMV) of the other property received.
The gain recognized is taxed as a dividend to the shareholder up to his ratable share of the corporation’s undistributed earnings and profits; any remainder of the gain is treated as capital gain.
If the receiving corporation distributes such money/other property in pursuance of the plan, no gain is recognized. If it does not distribute it as per the plan, gain (but not loss) is recognized up to the money plus FMV of the other property received that is not distributed.
If, as part of the consideration, another party assumes the taxpayer’s liability or acquires property subject to a liability, the assumption/acquisition is not treated as money or other property and does not prevent the exchange from falling within the exceptions.
“Securities” means bonds and debentures but excludes “notes” of whatever class or duration.
It includes: (1) an ordinary merger or consolidation; or (2) an acquisition by one corporation of all or substantially all the properties of another corporation solely for stock.
It must be undertaken for a bona fide business purpose and not solely for escaping taxation; the whole transaction/series must be treated as a single unit when determining business purpose; and “substantially all” includes cash assets of the transferor when determining the substantial portion of property transferred.
It limits the tax exemption to genuine business reorganizations; if the series of steps is undertaken primarily to avoid tax, the transaction will not qualify for the exception.
By considering each and every step of the transaction and treating the whole transaction or series of transactions as a single unit.
The term “property” includes cash assets of the transferor when determining whether the transferred property meets the “substantially all” standard.
The Commissioner is authorized to issue rules and regulations for determining the proper amount of transferred assets meeting the “substantially all” standard and for implementing the provision.
Upon its approval (approved June 19, 1965).