At some point, a stockholder may wish to sell his shares in the corporation. The basic steps in the process are:
1. Negotiation and execution of the deed of sale;
2. Payment of the capital gains tax/donor’s tax (if any) and the documentary stamp tax, and the filing of the appropriate returns with the Bureau of Internal Revenue (BIR);
3. Issuance of the tax clearance certificate/Certificate Authorizing Registration (CAR) by the BIR;
4. Presentation of the CAR to the Corporate Secretary, the registration by the Corporate Secretary of the sale in the stock and transfer book of the corporation, the cancellation by the Corporate Secretary of the stock certificates in the name of the seller and the issuance by the Corporate Secretary of new stock certificates to the buyer.
Let’s discuss each of those steps.
1. The Deed of Sale
The basic Deed of Sale will contain the following:
(a) the name and other personal details (e.g., civil status, citizenship, address, etc.) of the seller and the buyer;
(b) a description of the shares of stock being sold (including the number of shares sold, the par value of shares, the class of shares (if applicable) and the relevant stock certificate numbers);
(c) the purchase price for the shares (and terms of payment, if applicable).
The basic Deed of Sale may also include:
(a) representations and warranties of the seller (e.g., that the seller is the legal and beneficial owner of the shares, that the shares of stock are free from any liens and encumbrances, that the shares of stock are fully paid and non-assessable, etc.);
(b) provisions on payment of taxes and who will be responsible for obtaining the CAR.
(a) an agent may sign on behalf of a party to the transaction but such agent must be duly authorized by his principal (through a power of attorney);
(b) if the stock certificate is in the name of a person who holds the shares in trust for the beneficial owner, the trustee need not be a party to the deed of sale if the trustee has executed a declaration of trust with a special power of attorney authorizing the beneficial owner to sell the shares;
(c) legally, the deed of sale need not be notarized but it would be advisable to do so (particularly so that the risk that the BIR will raise any issue as to when the relevant taxes are due will be minimized);
(d) upon execution of the deed of sale, the seller should deliver the seller’s stock certificates to the buyer (unless no stock certificates have been issued because the shares have not been fully paid) so that the Corporate Secretary can subsequently cancel the stock certificates in the name of the seller and issue new stock certificates in the name of the buyer;
(e) usually, no governmental approvals are required for the sale of shares but there may be instances when such approvals are required (e.g., the corporation is covered by special laws regulating ownership of shares in such corporation).
2. Capital gains tax/donor’s tax and documentary stamp tax.
On the assumption that the stockholder is not a dealer in securities or otherwise exempt from capital gains tax, the sale of shares in a Philippine corporation will be subject to capital gains tax/donor’s tax and documentary stamp tax.
(a) Capital gains tax/donor’s tax
The sale of shares not listed in the stock exchange and held as a capital asset is subject to a capital gains tax at the rate of 5% for the first PhP100,000 of gain, and at the rate of 10% for gain exceeding PhP100,000. This tax is imposed on the seller. If the seller is a resident of a country that has an income tax treaty with the Philippines, the seller may be able to claim exemption from capital gains tax. The current position of the BIR is that a person who wishes to claim the benefits of a tax treaty must file an application for tax treaty relief with the BIR.
To determine the capital gains derived by the seller, the seller’s cost basis in the shares as well as the seller’s expenses of sale are deducted from the amount of consideration received by the seller (see Revenue Regulations No. 6-2008, sec. 7(c.3.1)). In this regard, in case of a cash sale, the selling price shall be the total consideration per deed of sale (see Revenue Regulations No. 6-2008, sec. 7(c.1.1). However, under Revenue Regulations No. 6-2008, in case the fair market value of the shares of stock sold is greater than the amount of money received by the seller, the excess of the fair market value of the shares of stock sold over the amount of money received as consideration shall be deemed a gift subject to the donor’s tax under Section 100 of the Tax Code (sec. 7(c.1.4)). In other words, in that situation, the transaction will be subject to donor’s tax. Thus, there may be situations where a sale transaction will be subject to both capital gains tax and donor’s tax, such as when a seller sells shares with a fair market value of PhP1000 at a selling price of PhP700 when his cost basis in the shares is PhP500. Here, PhP200 (i.e., PhP700 less PhP500) would be subject to capital gains tax while PhP300 (i.e., PhP1000 less PhP700) will be subject to donor’s tax.
The imposition of gift tax on the sale of shares under the scenario described above benefits individuals who are selling shares to their relatives (within the 4th degree of consanguinity), as these individuals may be able to avail of a rate of tax (ranging from 2% to 8%, depending on the amount of the gift) lower than the 10% capital gains tax that would have been applicable if the 10% capital gains tax (instead of donor’s tax) was imposed. On the other hand, persons (including corporations) who sell to unrelated parties are placed at a disadvantage, as the amount of the gift will be subject to donor’s tax at the flat rate of 30%. My personal view is that Section 100 of the Tax Code does not apply to ordinary business transactions where there is no donative intent (see, e.g., BIR Ruling DA-652-06 dated November 6, 2006).
The capital gains tax return must be filed and any capital gains tax due must be paid within 30 days after each transaction. The seller must also file a consolidated return after the close of the taxable year. The donor’s tax return must be filed and the donor’s tax must also be paid within 30 days after the gift is made.
(b) Documentary stamp tax
The sale of shares is subject to documentary stamp tax of PhP0.75 on each PhP200 of the par value (not the fair market value) of the shares sold. For shares with no par value,the amount of the documentary stamp tax payable is twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of said stock.
The documentary stamp tax can be paid either by the seller or the buyer. Generally, the buyer shoulders the documentary stamp tax.
The documentary stamp tax return and the documentary stamp tax must be paid not later than the 5th day of the month following the date of the transaction.
3. Certificate Authorizing Registration
After payment of the relevant taxes, the BIR can then issue the CAR, which is then is presented to the Corporate Secretary to support the request for the registration of the transfer of shares in the books of the corporation. Section 11 of Revenue Regulations No. 6-2008 provides:
SEC. 11. EFFECT OF NON-PAYMENT OF TAX. – No sale, exchange, transfer or similar transaction intended to convey ownership of, or title to any share of stock shall be registered in the books of the corporation unless the receipts of payment of the tax herein imposed is filed with and recorded by the stock transfer agent or secretary of the corporation. It shall be the duty of the aforesaid persons to inform the Bureau of Internal Revenue in case of non-payment of tax. Any stock transfer agent or secretary of the corporation or the stockbroker, who caused the registration of transfer of ownership or title on any share of stock in violation of the aforementioned requirements shall be punished in accordance with the provisions of Title X, Chapters I and II of the Tax Code, as amended.
Because the buyer has an interest in seeing to it that the sale of shares is recorded in the books of the corporation as soon as possible, the buyer would usually wish to be responsible for obtaining the CAR.
4. Recording of sale and issuance of new stock certificates
The final step in the sale process is the recoding of the transfer of shares in the corporate books, the cancellation of the stock certificates in the name of the buyer, and the issuance of new stock certificates in the name of the seller. In this regard, Section 63 of the Corporation Code provides:
No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.
It must be noted that no shares of stock against which the corporation holds an unpaid claim is transferable in the books of the corporation (Corporation Code, sec. 63).
(Note: This is part of a series of “How To” articles. These articles intend to give the reader a general overview of the legal aspects of doing certain things and they will not contain all details regarding the proposed action. There may be changes to applicable laws and regulations after the article is posted. You should consult your lawyer if you wish to take a particular action. See Disclaimer page for additional disclaimers.)