MERGER OF DOMESTIC AND FOREIGN CORPORATIONS
By: Euney Marie J. Mata-Perez on February 14, 2019
Private corporations are created by fiction of law, and they owe their existence to the law establishing them. In our jurisdiction, such law is the Corporation Code. Upon the issuance by the Securities and Exchange Commission (SEC) of its certificate of incorporation, a corporation acquires a separate and distinct juridical personality from its stockholders.
Two or more corporations may undergo a merger, where the separate existence of the absorbed corporations ceases and the surviving corporation assumes all the assets and liabilities of the absorbed corporations by operation of law.
As to the tax liabilities of the process, the merger is exempt from income tax pursuant to the provisions of Section 40(C)(2) of the National Internal Revenue Code (Tax Code), if it is undertaken for bona fide or valid business purposes and not solely for the purpose of escaping the burden of taxation.
Since corporations owe their legal personalities or existence from the law which establishes them, the question then is can a foreign corporation which is organized under the laws of a foreign country merge with a domestic corporation organized under a separate law, or our Corporation Code in this case?
The relevant provision is Section 132 of the Corporation Code which states that foreign corporations authorized to transact business in the Philippines “may merge” with a domestic corporation “if such is permitted under Philippine laws” and the same is allowed by the laws of incorporation of the foreign corporation.
In an opinion dated October 23, 1985, the SEC ruled that domestic corporations have no inherent power to merge with foreign corporations. The SEC opined that there seems to be no express provision in the Corporation Code that permits this type of merger, and there is also no other statute which will allow such a merger in our jurisdiction. Thus, it disallowed the merger of a domestic corporation with an affiliated foreign corporation which is licensed to do business in the Philippines.
However, in an opinion dated November 26, 2018, the SEC reversed its 1985 position and held that the language of Section 132 already grants the foreign corporation the authority to merge with a domestic corporation, provided that the former can show or prove that there is a similar authorizing law in its home jurisdiction. The authority can be gathered from the words “may merge” or “may be merged” in said section.
The SEC pointed out though that such a merger cannot just be between the branch of a foreign corporation and a domestic corporation. Since the foreign corporation and its branch are one and the same entity, the merger has to be with the foreign corporation itself (together with its branch) and the domestic corporation.
The SEC emphasized that the phrase “if such is permitted under Philippine laws” under Section 132 of the Corporation Code should be construed to include our nationality laws. Thus, if the surviving corporation is engaged in any nationalized activity, the merger should not be allowed if it results in foreign ownership limitations being breached.
It should be stressed though that there are other modes through which a business or assets of a local branch of a foreign corporation may be acquired by a domestic corporation. For instance, the assets of the local branch may be transferred to a domestic corporation, in exchange for shares of the latter. Alternatively, the assets of the local branch can be spun-off into a domestic corporation, and such domestic corporation can merge with any other domestic corporation.
The costs and tax consequences of the mode or steps to be taken in any merger or restructuring should always be considered. Under our Tax Code, an exchange of assets for shares can be exempt from income tax if the transferor (together with other persons not exceeding four) gains control of the transferee. Also, as mentioned, a merger can be exempt from tax if it is undertaken for bona fide business purposes.
Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer. She is the President of the Asia-Oceana Tax Consultants’ Association. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at firstname.lastname@example.org or visit MTF Counsel’s website at www.mtfcounsel.com
From the The Manila Times website on February 14, 2019