Tax Free Exchanges

Tax-free exchanges refer to those instances defined in the Tax Code of 1997 that are not subject to Income Tax under relevant provisions of the same Code.

In general, there are two kinds of tax-free exchange: (1) transfer to a controlled corporation; and, (2) merger or consolidation.

In the first instance, no gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation.

In the second instance, no gain or loss shall be recognized if in pursuance of a plan of merger or consolidation --- (a) 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) a shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or, (c) a security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation.

In certain cases where there are clear guidelines, the Assistant Commissioner for Legal Service shall issue a certification-ruling under BIR Form No. 2325. Otherwise, the Deputy Commissioner for Legal and Inspection Group shall issue the necessary long-form ruling.

What this is For:

BIR Form No. 1927 Application and Joint Certification (Not available online)

BIR Form No. 2325 - Certification

Other Documentary Requirements:

REVENUE MEMORANDUM CIRCULAR NO. 39-2001SUBJECT : Further Delegation of Authority to the Assistant Commissioner of Internal Revenue, Legal Service to Sign Rulings with Established PrecedentsTO : All Internal Revenue Officers and Others Concerned______________________________________________________________________________________In order to expedite actions on certain cases and documents with established precedents and pursuant to Section 7 of the National Internal Revenue Code of 1997, the Assistant Commissioner, Legal Service, is hereby authorized to sign rulings and actions that are clearly covered by precedent rulings and guidelines as well as pertinent issuances on the subject, as follows:1. Tax-deferred exchanges of property for shares under Section 40(C)(2) of the Tax Code of 1997 under appropriate guidelines;2. Transfer of property by a pre-need corporation to a trustee in accordance with SEC guidelines on the establishment of trusts by pre-need companies;3. Tax consequence of exchanges of properties made in order to correct clear mistakes relating to ownership of subdivision lots;4. Joint ventures for real estate development where no cash advance or other payments are made to any co-venturer;5. Exemption or taxability of gains from sale or transfer of shares of stock in domestic corporations by non-resident foreign corporations pursuant to applicable provisions of the tax treaties to which the Philippines is a signatory;6. Taxability or exemption of income of a resident of a foreign country from independent personal services by virtue of a tax treaty;7. Embassy requests, either for itself or on behalf of its employees, for tax exemption;8. Tax exemption of income derived by foreign governments from their investments in the Philippines pursuant to Section 32(B)(7)(a)(1) of the Tax Code of 1997; and9. Tax exemption of interest and/or dividend income of such foreign government institutions as are specified in the tax treaties to which the Philippines is a signatory or in exchanges of letter between the government of the Republic of the Philippines and the foreign government.For this purpose, the documentary requirements that will have to be complied with and submitted at the time of filing the request for ruling shall be those listed in Annex 'A', which is made an integral part hereof.It is provided, however, that if the taxpayer believes that the ruling issued is erroneous or that the request remains unacted after the lapse of a reasonable period of time, he/it may appeal his/its case to the Deputy Commissioner, Legal and Inspection Group.The Commissioner or the Deputy Commissioner for Legal and Inspection Group may, motu proprio, reverse, modify or alter any such ruling issued by the Assistant Commissioner, Legal Service, at any time after its issuance if he determines the same not to be in accordance with the established precedent rulings or pertinent tax laws and revenue issuances, but after due notice to the taxpayer and in accordance with Section 246 of the Tax Code of 1997, without prejudice, however, to administrative sanctions relative to such actions.This Circular shall take effect immediately upon approval.

(Original Signed)REN G. BAEZCommissioner