Asset Only Transfer in the Context of Mergers, Consolidations, and Acquisitions in the Philippines

The concept of an "Asset Only Transfer" within mergers, consolidations, and acquisitions (MCAs) in the Philippines pertains to transactions where only the assets of a corporation are transferred to another entity, as opposed to transferring equity or merging entire corporate structures. This method is distinct from stock acquisitions or full mergers, as it involves selling, transferring, or otherwise disposing of only the selected assets of a corporation, typically without the liabilities or corporate structure.

Below is a detailed examination of the key aspects of asset-only transfers under Philippine law, including its legal requirements, taxation implications, and regulatory considerations.

1. Legal Framework Governing Asset Only Transfers

A. Corporation Code (Revised Corporation Code of the Philippines, Republic Act No. 11232)

The Revised Corporation Code allows corporations to sell or transfer their assets under certain conditions. Specifically:

Board Approval Requirement: Asset-only transfers generally require approval from the corporation’s Board of Directors, especially if the sale or transfer pertains to substantial assets of the company.
Stockholder Approval Requirement: Under Section 39 of the Revised Corporation Code, the sale of all or substantially all assets requires an affirmative vote by stockholders holding at least two-thirds (2/3) of the outstanding capital stock if the transaction effectively disposes of the company’s business or property.

B. Philippine Competition Act (Republic Act No. 10667)

For certain asset transfers that may impact market competition, the Philippine Competition Act mandates:

Review and Approval from the Philippine Competition Commission (PCC): If the transaction meets the PCC’s threshold for “merger or acquisition,” it may require prior approval to ensure it does not substantially lessen competition. Failure to notify the PCC can invalidate the transaction and subject the corporation to fines.

C. Securities Regulation Code (Republic Act No. 8799)

If assets include securities, such as equity in other entities, the Securities and Exchange Commission (SEC) may need to review aspects of the transfer to protect the interests of shareholders, particularly minority shareholders, and to ensure the transaction does not undermine investor protections under the Securities Regulation Code.

2. Taxation Implications of Asset Only Transfers

In the Philippines, asset-only transfers trigger specific tax liabilities depending on the nature and value of the assets involved. Below are the critical tax considerations:

A. Value-Added Tax (VAT)

Asset transfers involving goods, properties, or services that qualify as taxable under the VAT system will be subject to a 12% VAT. For instance, if the assets involve inventory or operational equipment, VAT applies based on the fair market value or book value, whichever is higher.
Transfers of real property as part of an asset-only sale can be subject to VAT if the corporation regularly engages in real estate transactions.

B. Documentary Stamp Tax (DST)

The DST applies to transactions involving the transfer of assets such as real property or shares of stock in affiliated entities. For example, if the assets include land or buildings, the DST rate is 1.5% of the selling price or fair market value, whichever is higher.

C. Capital Gains Tax (CGT)

A capital gains tax of 6% applies to the sale or disposition of real property located in the Philippines held as a capital asset. Notably, for corporations, gains derived from the sale of such property must be remitted to the Bureau of Internal Revenue (BIR).

D. Transfer Tax and Local Business Taxes

Local governments may impose transfer taxes on real property assets at rates that vary by locality, typically not exceeding 0.5% of the asset’s value. Additionally, certain local business taxes may apply, depending on the jurisdiction and nature of the business.

E. Income Tax on Gains

The transfer of assets at a profit triggers income tax on the realized gain, calculated as the difference between the selling price and the book value of the assets transferred. This tax is typically applied to corporations’ net taxable income, currently at 25% or 20% for large corporations under the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act).

3. Regulatory Approvals and Compliance Considerations

Asset-only transfers often involve regulatory approvals from agencies beyond the SEC and PCC, depending on the industry sector and asset type:

A. National Economic and Development Authority (NEDA)

Foreign ownership may affect asset transfer transactions, particularly in industries where foreign equity restrictions apply. NEDA may be involved if assets are transferred to foreign entities or in industries subject to nationalization rules (e.g., public utilities, media).

B. Department of Environment and Natural Resources (DENR)

For assets that include environmentally sensitive properties, like land with natural resources or facilities with significant environmental impact, DENR permits may be required before the asset transfer.

C. Industry-Specific Regulatory Bodies

Certain industries, such as banking (regulated by the Bangko Sentral ng Pilipinas or BSP), telecommunications (regulated by the National Telecommunications Commission or NTC), or insurance (regulated by the Insurance Commission), have unique compliance requirements for asset transfers involving licensed assets or properties essential to the operation of regulated entities.

4. Strategic Considerations in Asset-Only Transfers

A. Risk and Liability Management

In asset-only transfers, acquiring companies can choose specific assets while avoiding unwanted liabilities, often making it a preferred method over full mergers or stock acquisitions, where all liabilities and obligations are inherited.

B. Due Diligence

Due diligence is critical to assess potential tax implications, undisclosed liabilities associated with the assets, and regulatory encumbrances (e.g., mortgages or liens). Comprehensive due diligence can help prevent post-transfer disputes.

C. Structuring and Pricing

Asset-only transactions require careful structuring to optimize tax outcomes, particularly in cases where high-value assets (e.g., real estate) are involved. Structuring the sale price and terms, possibly through installment sales or deferred payment arrangements, can help minimize upfront tax liabilities.

D. Employee Retention and Continuity

When an asset transfer includes facilities or significant operational assets, employee continuity may be a concern. Asset transfers generally do not automatically transfer employee contracts unless expressly included, meaning the acquiring company might need to renegotiate employment terms or hire new staff.

Conclusion

Asset-only transfers provide flexibility in acquisitions, allowing a purchasing entity to acquire valuable assets while excluding liabilities and certain obligations. In the Philippines, executing such a transfer involves strict compliance with corporate governance requirements under the Revised Corporation Code, tax regulations, and regulatory standards from agencies such as the PCC, SEC, and potentially industry-specific bodies. Meticulous attention to taxation and regulatory compliance is essential, as is thorough due diligence to ensure the valuation, transfer procedures, and post-transfer obligations align with legal and business objectives.