RMO No. 17-2016: Supplements the guidelines for the non-recognition of gain or loss on the transfer of property in exchange for shares of stock pursuant to Section 40(C)(2) in relation to Section 40(C)(6)(c) of the Tax Code of 1997 as implemented by RR No. 18-2001

Summary

RMO No. 17-2016 supplements the guidelines for securing a tax-free exchange ruling under RMO No. 32-2001 and RR No. 18-2001, specifically the number of shares issued in exchange for property under Section 40(C)(2) of the Tax Code.

Key points

1. Value for value. The value of shares issued must equal the fair market value of the property transferred. The number of shares is computed from that fair market value.
2. Transferee corporation. The transferee records the property at fair market value and uses the substituted basis under RR No. 18-2001 for gain or loss on later sale. It adds a note to its audited financial statements submitted to the BIR with the Section 40(C) acquisition, transaction date, substituted basis, number of shares and shareholder breakdown.
3. Transferor. The transferor records the shares received at their substituted value. It adds a note to its audited financial statements submitted to the BIR with the Section 40(C) acquisition, date, property transferred, substituted basis, number of shares and the name of the Transferee Corporation.
4. Ruling on later transfers. Both parties must present a copy of the tax-free exchange ruling when the property or the shares received are later transferred, assigned or sold.
5. Valuing shares of stock. Listed shares are valued at the closing price on the transfer day, or the closest day if no sale was made. Unlisted shares are valued at book value from the certified annual financial statements nearest the sale date, with assets adjusted to fair market value as of a date not earlier than 90 days from the transaction, under RR No. 6-2013.
6. Basis and input VAT. If property is later sold, the transferee’s basis equals the transferor’s basis increased by the gain recognized by the transferor. Input VAT on the property transferred is based on its fair market value.

Who is affected

• Transferee corporations and transferors in tax-free exchanges under Section 40(C)(2)

Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.