Transfers of shares held in trust are not subject to tax

MANILA  -In corporate law, it is common practice for lawyers to handle transfers of shares of stock from nominees to their principals, or to new nominees. Prior to the Revised Corporation Code, which came into effect in February 2019, corporations were required to have at least five stockholders and directors, each holding a minimum of one share of stock in the company.

When establishing a corporation, business owners would often seek out nominees to hold a qualifying share in order to meet the requirement of five shareholders. Typically, these nominees are the trusted officers of the principal stockholder who, since they do not own the company, eventually move on to other employment opportunities, thereby severing their connection with the company.

In such cases, the nominees would execute a deed of assignment of the shares to return them to the principal or to the new nominee who will be taking their place.

Even with the introduction of the Revised Corporation Code which allows for less than five stockholders in a corporation, many companies still prefer to maintain several board seats in their board for various reasons, one of which is for good governance.

Accordingly, transfers of shares of stock from nominees to new nominees are quite common. Oftentimes, the transfer of shares is done by the execution of a deed of assignment by the nominee to the principal or new nominee. However, issues concerning actual consideration for the transfer and the taxes that may be due may arise. Moreover, the relevant laws and regulation provide that before registering a transfer of share to the new shareholder, the corporation’s corporate secretary must satisfy itself that proper taxes have been paid to the Bureau of Internal Revenue (BIR). This is done by the submission of the tax returns and the tax clearance or certificate of authority to register issued by the BIR.

In terms of taxation, currently, the sale of shares of stock is subject to a flat rate of 15 percent on capital gains taxes (CGT). There is also the Documentary Stamp Tax (DST) which is P1.50 for every P200 on the sale or transfers of shares of stocks. It also used to be the practice of the BIR examiners to assess Donor’s Tax on the transaction when the declared consideration for the transfer of shares was below the book or market value.

The taxes that may be imposed could be substantial, as some nominees may hold thousands of shares in their names. This practice is not prohibited nor uncommon, as the only requirement is that the shareholder and director hold at least one share of stock.

Accordingly, are these transfers of shares of stock by nominees back to their principal or to the new nominees subject to the CGT, DST, or Donor’s Taxes ?

The answer is: No.

In a tax ruling dated Nov. 8, 2021, Sun Life of Canada (Philippines), Inc. (Sun Life), requested the BIR for an exemption from the payment of taxes on the transfer of their Manila Polo Club shares.

Sun Life’s shares were registered in the name of and assigned to its officers who were allowed to make use of the facilities of the Polo Club in building their business network. It sought a transfer of the shares to a new set of officers as the previous officers were no longer connected with the company.

The company representatives all executed Declarations of Trust where they declared that Sun Life is the true and beneficial owner of the shares, that the shares were registered in their names because the articles of incorporation of the Manila Polo Club provides that no institutional members shall be admitted as a shareholder, that they have no title, right, claim or interest whatsoever over the shares, and Sun Life may designate another company officer as the new holder and user of the shares.

The BIR confirmed that:

1. The transfer of shares from the nominee-officers to the new nominee-officers were not subject to Capital Gains Taxes
2. The transfers are also not subject to the Documentary Stamp Taxes;
3. The transaction is not a Donation
4. The tax that is due is the Documentary Stamp Taxes on the Deeds of Declaration of Trust

(BIR Ruling No. OT – 0653-2020, November 8, 2021)

No CGT due

Sun Life’s shares of stock in the Manila Polo Club in the name of its nominees were covered by Declarations of Trust executed by the nominees all of whom acknowledged that the transfer did not give them any kind of right, claim or interest whatsoever in the shares and that they are holding only legal ownership of the same where the beneficial ownership belongs to the Company.

It was established that Sun Life was the one who purchased the shares and had registered the same in the officers’ names, who were its nominees, since the Articles of Incorporation and By-laws of the Manila Polo Club provided that only natural persons may become registered members.

Sec. 24 (C) of the National Internal Revenue Code provides that a final tax rate of fifteen percent is imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange, or other disposition of shares of stock in a domestic corporation, except shares sold or disposed of through the stock exchange.

Accordingly, CGT is only imposed upon the “net capital gains” realized during the taxable year which means the tax is on gain or profit from the sale of capital assets.

Since the transfer of the Manila Polo Club shares only involves legal title and not beneficial ownership, which remains with Sun Life, then there is no gain or profit and consequently, no capital gains taxes are due.

The BIR found that no capital gains taxes are due considering that:

(1) the shares are actually owned by Sun Life, and the transferors and transferees are mere nominees and/or trustees of Sun Life who only hold legal title
(2) There is no actual transfer of ownership and beneficial title
(3) no monetary consideration is involved, no gain or profit resulted in the transfer which is merely by virtue of an assignment as evidenced by the Declaration of Trust.

No DST Due

In the matter of DST, the BIR declared that a mere transfer of a share from one trustee to another, without a change in the beneficial ownership of the share is, therefore not the taxable transaction being contemplated under the Tax Code provision on DST. There being no new conveyance to speak of in this case, there is no new exercise of a privilege upon which DST may be imposed.

DST on trust document

DST is however due on the Declaration of Trust.

Not a donation

There is a lack of any intention on the part of the transferors to donate to the transferee the Manila Polo Club shares. Moreover, the transaction was found to be purely for a legitimate business purpose. Accordingly, there is no donation and no donor’s tax due.

The BIR confirmed that in a trust relationship covered by a declaration of trust, transfers by the nominee of shares of stock held by it back to the principal or to a new a nominee is not subject to CGT and DST. It is also not a donation subject to donor’s taxes.

Lastly, just a final word on trust for our readers.

A trust is a legal relationship where one person has equitable ownership of property and another person owns the legal title to the property. Trusts are distinguished by the separation of legal title and equitable ownership of the property, with the fiduciary (trustee) holding legal title and the trustor holding equitable title. (Soledad Caezo vs. Rojas, G.R. No. 148788, November 23, 2007)

A trust may be expressed or implied. In this case, the Declaration of Trust referred to in BIR Ruling No. OT – 0653-2020 is an express trust. It is a document whereby a person acknowledges that they hold the property title for the use of another.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, teaches law at the MLQU School of Law, and an Arbitrator of the Construction Industry Arbitration Commission of the Philippines. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)