Get Adobe Reader

In order to view PDF files, you need to install Adobe Reader. Please click here to download a free copy of Adobe Reader.

Transferring Deposits for Future Subscription

Transferring Deposits for Future Stock Subscription

By  Tata D. Panlilio

Deposits on stock subscription generally represent funds or sometimes even properties received by a corporation which it records as such with a view to applying the same as payment for a future additional issuance of shares or increase in capital stock. 

Deposits on stock subscription generally represent funds or sometimes even properties received by a corporation which it records as such with a view to applying the same as payment for a future additional issuance of shares or increase in capital stock. 

Unlike a holder of subscribed shares who has all the rights of a stockholder even if the shares have not been fully paid (provided the shares are not declared delinquent), a person or entity that makes a deposit on stock subscription in favor of a corporation does not, as yet, have the standing of a stockholder nor is he entitled to the rights and attributes of a stockholder.
 
The existing tax regulations and rulings on the sale or transfer of shares of stock (not traded in the stock exchange) that have been fully paid are quite clear, and may be familiar to most. 

The net capital gains realized from the sale, exchange or other disposition of such shares shall be subject to a capital gains tax (CGT) at the rate of 5% on net gains not over Php100,000.00, and 10% on the amount of net gain in excess of Php100,000.00.  In addition, the sale or transfer of said shares is subject to documentary stamp tax (DST) at the rate of Php0.75 for every Php200.00, or fractional part thereof, of the par value of the shares sold or transferred.

However, not many may be aware of the tax implications of a transfer or assignment of deposits on stock subscription.  Indeed, the nature of deposits on stock subscription, as described above, has raised the issue of whether a transfer or assignment thereof falls within the purview of the term “shares of stock” and thus, should be taxed accordingly as such.

This issue was resolved by the Court of Tax Appeals (CTA) in a 1995 decision involving the assignment of a certain number of issued shares and subscribed shares as well as deposits on stock subscriptions for a specific number of shares

The CTA held that “there was indeed a valid sale even as they are considered future things (such as the Deposits on Stock Subscription)” as contemplated under Article 1461 of the Civil Code which provides in part: “[T]hings having a potential existence may be the object of a contract of sale. The efficacy of a sale of a mere hope or expectancy is deemed subject to the condition that the thing will come into existence.”  The CTA expressly ruled that “Deposit on Stock Subscription is included as taxable ‘shares of stock’ subject to CGT at the rate of 5% on net gains not over Php100,000.00, and 10% on the amount of net gain in excess of Php100,000.00.

With respect to DST, the CTA held that the “intent to tax Deposits on Stock Subscription is clear under Section 176 of the 1997 Tax Code, as amended, which provides in part: “[O]n all sales, or agreements to sell, xxx or transfer of xxx shares or certificates of stock in any association, company or corporation, xxx whether entitling the holder in any manner to the benefit of such xxx certificate of xxx stock, or xxx for the future transfer of any xxx certificate of xxx stock, there shall be collected a documentary stamp tax of Php0.75 for every Php200.00, or fractional part thereof, of the par value of such xxx certificate of stock xxx.” 

The foregoing decision of the CTA was appealed to the Court of Appeals (CA).  In a 1997 decision, the CA upheld the ruling of the CTA.  Of particular interest is that the CA took note of the BIR’s argument that the assignment of the deposits for stock subscription represented payment for a specific number of shares to be reserved for the stockholder- assignor.

Thereafte r, the CA decision was brought to the Supreme Court for review.  In a 2006 decision, the Supreme Court once again focused on the issue of whether the assignment of deposits for stock subscription is subject to DST and CGT.  Citing Section 176 of the 1997 Tax Code above-mentioned as basis, the Supreme Court affirmed the rulings of both the CTA and CA that the assignment of the deposits for stock subscription is subject to DST.

With respect to CGT, the Supreme Court held that the CTA committed no error in affirming the decision of the CA and ruled that “a tax on the profit of sale on net capital gain is the very essence of the net capital gains tax law.”

Given the foregoing backdrop of decisions by the CTA, CA and Supreme Court, respectively, it would seem that the tax implications of a transfer or assignment of deposits on stock subscription have been settled.

(The author is a senior tax manager at Punongbayan & Araullo, member of Grant Thornton International.  For comments and inquiries, please e-mail the author or call 886-5511.)