BIR Ruling No

March 18, 2013
BIR RULING NO. 094-13
Sec. 29 of Tax Code of 1997, as

amended; RR No. 2-2001
Alfredo V. Misajon
OIC-Assistant Commissioner
Large Taxpayers Service
Attention: Maria Socorro O. Lozano

Large Taxpayers Division-Cebu
Gentlemen :
This refers to your Memorandum dated 5 February 2013 requesting

for a confirmatory ruling as to whether or not BIR can assess CEBU AIR,
INC. of Improperly Accumulated Earnings Tax (IAET) for being a closely-
held corporation pursuant to Section 29 of the Tax Code of 1997 as
implemented by Revenue Regulations (RR) No. 2-2001. AcSCaI
A perusal of the General Information Sheets (GIS) attached to the

above-stated Memorandum will show that CEBU AIR, INC. a domestic
corporation, is 66.15% owned by CPAir Holdings, Inc. On the other hand,
CPAir Holdings, Inc. is wholly-owned by JG Summit which, in turn, is
owned by the following individual stockholders, to wit:
1. Gokongwei Brothers Foundation 29.38%
a. John Gokongwei, Jr.
b. Elizabeth Gokongwei
c. Lance Gokongwei
d. Robina Gokongwei
e. Patrick Henry L. Go
f. Johnson Robert Go, Jr.
g. James L. Go.
2. John Gokongwei, Jr. 12.75%
3. Lance Y. Gokongwei &/or Elizabeth Gokongwei 3.46%
4. James L. Go 2.19%
5. John Gokongwei &/or Lance Gokongwei 2.07%
6. Robina Gokongwei Pe &/or Elizabeth Gokongwei 1.06%

50.91%
======
In reply, please be informed that Section 29 (A) and (B) of the Tax
Code of 1997, as amended, and as implemented by RR No. 2-2001,
provides that in addition to other taxes imposed by Title II of the Tax Code,
there shall be imposed for each taxable year a tax equal to 10% of the
improperly accumulated taxable income of corporations formed or availed
of for the purpose of avoiding the income tax with respect to its
shareholders or the shareholders of any other corporation, by permitting
the earnings and profits of the corporation to accumulate instead of
dividing them among or distributing them to the shareholders.
Thus, IAET is being imposed in the nature of a penalty to the
corporation for the improper accumulation of its earnings, and as a form of
deterrent to the avoidance of tax upon shareholders who are supposed to
pay dividends tax on the earnings distributed to them by the corporation.
However, the IAET shall not apply to, among others, publicly-held
corporations.
Section 29 of the Tax Code of 1997 provides, viz.:
"SEC. 29. Imposition of Improperly Accumulated
Earnings Tax.
xxx xxx xxx
(B) Tax on Corporations Subject to Improperly
Accumulated Earnings Tax.
(1) In General. The improperly accumulated earnings
tax imposed in the preceding section shall apply to every
corporation formed or availed for the purpose of avoiding the
income tax with respect to its shareholders or the shareholders of
any other corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed.
(2) Exceptions. The improperly accumulated earnings
tax as provided for under this Section shall not apply to:
(a) Publicly-held corporations; DSETac
(b) Banks and other non-bank financial

intermediaries; and
(c) Insurance companies.
xxx xxx xxx"
Furthermore, second paragraph of Section 4 of RR No. 2-2001
entitled "Implementing the Provision on Improperly Accumulated Earnings
Tax under Section 29 of the Tax Code of 1997" provides that:
For purposes of these Regulations, closely-held corporations
are those corporations at least fifty percent (50%) in value of the
outstanding capital stock or at least fifty percent (50%) of the total
combined voting power of all classes of stock entitled to vote is
owned directly or indirectly by or for not more than twenty (20)
individuals. Domestic corporations not falling under the aforesaid
definition are, therefore, publicly-held corporations.
The same section further provides that "for purposes of determining
whether the corporation is closely held corporation, insofar as such
determination is based on stock ownership, stock owned directly or
indirectly by or for a corporation, partnership, estate or trust shall be
considered as being owned proportionately by its shareholders, partners or
beneficiaries."
Based on the foregoing, this Office is of the opinion that CEBU AIR,
INC. is not a publicly held corporation since 66.15% of its shareholdings is
owned by CPAir Holdings, Inc. which is wholly-owned by JG Summit.
Although CEBU AIR, INC. is ultimately owned by JG Summit, a corporation
owned by more than 20 stockholders, CEBU AIR, INC. is still not a publicly
held corporation exempt from IAET as contemplated under Section 29 (B)
of the Tax Code of 1997, as amended, in relation to RR No. 2-2001. The
ownership of a domestic corporation for purposes of determining whether it
is a closely-held corporation or a publicly-held corporation is ultimately
traced to the individual shareholders of the parent company. Thus, where
at least 50% in value of the outstanding capital stock or of the total
combined voting power of all classes of stock entitled to vote in a
corporation is owned directly or indirectly by not more than 20 individuals,
the corporation is considered a closely-held corporation.
By applying the above-cited test under Section 4 of RR 2-2001, the
ultimate parent company of CEBU AIR, INC., JG Summit, is not a publicly-
held corporation for purposes of exemption from IAET. It is noted from the
GIS of JG Summit, as above listed, that at least fifty percent (50%) in value
of the outstanding capital stock or at least fifty percent (50%) of the total
combined voting power of all classes of stock entitled to vote is not owned
directly or indirectly by or for not more than twenty (20) individuals.
cCTaSH
It must be observed that although the number of majority

stockholders of JG Summit is more than 10, the actual number of persons
who control the company is limited to 5-6 persons. It is noteworthy that
stockholders of Gokongwei Brothers Foundation who owns 29.38% of JG
Summit are likewise the majority stockholders of JG Summit. Thus, if we
consider CEBU AIR, INC. a publicly-held corporation, the purpose of the
IAET provision will be defeated.
Considering that CEBU AIR, INC. is a closely-held corporation, it can
be assessed of IAET under Section 29 of the Tax Code of 1997, as
amended, as implemented by RR No. 2-2001.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation, it will be disclosed that the
facts are different, then this ruling shall be considered null and void.
Very truly yours,
(SGD.) KIM S. JACINTO-HENARES

Commissioner of Internal Revenue

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March 18, 2013

BIR RULING NO. 094-13

Sec. 29 of Tax Code of 1997, as

Attention: Maria Socorro O. Lozano

This refers to your Memorandum dated 5 February 2013 requesting

A perusal of the General Information Sheets (GIS) attached to the

(b) Banks and other non-bank financial

It must be observed that although the number of majority

(SGD.) KIM S. JACINTO-HENARES

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