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Deposits for Future Stock Subscription

Deposits for Future Stock Subscription

By:  Arnold P. Supilanas

Pending the acceptance by the corporation of the stockholder’s subscription, funds received for that purpose are temporarily recorded as“Deposits for Future Subscription of Capital Stock”.  Under the generally accepted accounting principles, such account is allowed to be presented as part of the stockholders equity for balance sheet presentation purposes.  However, the same cannot be considered as part of the capital of the corporation until shares of stocks are actually issued in consideration thereof.

Given this situation, you may wonder what is the standing of the person or entity making the deposit? Will the person making the deposit be entitled to the rights and attributes of a stockholder?  Is the deposit on stock subscription considered an original issuance of shares of stock subject to documentary stamp tax (DST)?

In general, a deposit for future stock subscription refers to the amount of money or sometimes even property received by a corporation with the purpose of applying the same as payment for future issuance of stocks which may or may not materialize. A person or entity that makes a deposit on stock subscription in favor of a corporation does not have the standing of a stockholder nor entitled to the rights and attributes of a stockholder.  Consequently, the deposit: (1) is not entitled to the receipt of any dividend; (2) is not included in the determination of quorum at meetings nor in the counting of votes requiring shareholder’s action; (3) is not eligible to be voted upon; and (4) in general, cannot exercise stockholders rights or privileges.

One of the issues normally encountered during examination conducted by the tax authorities is whether or not the deposit on future stock subscription is tantamount to original issuance of shares subject to DST.

Our 1997 Tax Code imposes DST upon documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto.  DST is also levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments. Section 175 of the Code imposes DST upon the privilege, opportunity, and the facility of issuing shares of stock.  Section 176, on the other hand, imposes DST on the sale or transfer of shares of stock.

The Supreme Court, in a recently decided case, confirmed that that deposits on future subscription of shares of stock are not subject to DST for the reason that there is yet no subscription that creates rights and obligations between the subscriber and the corporation.

The DST attaches only upon acceptance of the stockholder’s subscription in the corporation’s capital stock regardless of actual or constructive delivery of the certificates of stock.  It is imposed when the stockholder acquires and may exercise attributes of ownership over the stocks.  Both Sections 175 and 176 of the Tax Code of 1997 contemplate a subscription agreement in order for a taxpayer to be liable to pay the DST.  The Corporation Code of the Philippines defines subscription contract as any contract for the acquisition of unissued stocks in an existing or soon to be formed corporation.  A stock subscription is a contract by which the subscriber agrees to take a certain number of shares of the capital stock of a corporation, paying for the same, or expressly or impliedly promising to pay for the same.

According to the Supreme Court, the government stands to lose nothing in imposing the documentary stamp tax only on those stock certificates issued, or wherein the stockholders can freely exercise the attributes of ownership and with value at the time they are originally issued.

However, while the deposit are yet tax-free, note that the Supreme Court has also ruled in a 2006 decision that transfer or assig nment of deposits on stock subscription is subject to DST as well as to capital gains tax on the sale or transfer of shares not traded in the stock exchange.   

Hence, if you are looking at your deposit on stock subscription as a potential source of liquidity in these critical times, any decision to unload that deposit on stock subscription should be made in consideration of this tax treatment .  Other modes that may not attract as much taxes should be seriously considered.

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at Arnold.Supilanas@ph.gt.com.  For other tax concerns, please check out our other tax services.