Subscription: Plain and simple

To become a stockholder is one of the ways to invest one’s hard-earned money. A person could become a stockholder of a corporation through subscription of its shares. Ideally, a person who agrees and acquires a certain number of unissued shares of stock of a corporation, paying the consideration thereof, will be issued a subscription contract.

The Securities and Exchange Commission (SEC) has opined that it is a general rule in our corporation laws that a subscriber for stock in a corporation becomes a stockholder as soon as his subscription is accepted by the corporation, whether or not a certificate of stock is issued to him and although he may have no certificate, he is thereupon entitled to all the rights and is subject to all the liabilities of a stockholder.

The issuance of the certificate of stock, on the other hand, is governed by specific rules found under Section 64 of the Corporation Code of the Philippines which provides that, “no certificate of stock shall be issued to a subscriber until the full amount of his subscription, together with interest and expenses (in case of delinquent shares), if any is due, has been paid.” The foregoing provision sets forth the Doctrine of Indivisibility of Subscription. This doctrine espouses that the subscription is one, entire, indivisible and whole contract which cannot be divided into portions.

This doctrine has been confirmed again recently by the SEC when it issued SEC-OGC Opinion No. 16-05 on March  31. In the opinion, the SEC recapitulated that a subscription is one, entire and indivisible contract. It cannot be divided into portions so that no stockholder shall be entitled to a certificate of stock until said stockholder has paid the entire value of the shares subscribed, including the interest and expenses. The opinion emphasized that the Doctrine of Indivisibility of Subscription is absolute since the above-quoted Section 64 speaks of no exception.

It is worthy to note, however, that the so-called Doctrine of Indivisibility of Subscription does not impact the mode of payment on the subscription.  In the same opinion, the SEC enunciated that the balance of subscriptions may be made by installment because Section 67 of the Corporation Code of the Philippines itself provides that payment of any unpaid subscription or any percentage thereof may be made either on the date specified in the subscription contract or upon call made by the board of directors (BOD). Failure to pay on the specified date shall render the entire balance due and payable. If within 30 days from the specified date in the subscription contract or in the call, the stockholder does not pay, the whole subscription shall automatically become delinquent and shall be subject to delinquency sale at public auction, unless the BOD declares otherwise.

The SEC further upheld that a stockholder shall only be entitled to the issuance of a certificate of stock upon full payment of the amount of subscription, together with interest and expenses. In the same manner, a stockholder who has not fully paid cannot transfer part of his unpaid subscription to a third-party assignee. However, the entire subscription, although not yet fully paid, may be transferred to a single transferee who shall assume the unpaid balance. In such circumstance, the consent of the corporation has to be secured first.

SEC-OGC Opinion No. 16-05 highlighted the standing rule that no certificate of stock shall be issued until the full amount of subscription, together with interest and expenses, if any is due, has been paid. As cited in another SEC opinion, to permit the issuance of stock certificate for payment of a subscription that does not cover the entire number and value of the shares subscribed would violate the law.

Thus, the investor can exercise the rights of a stockholder even in the absence of a certificate of stock, thereby enjoying the fruits of his hard labor.

It should be noted also that the absence of a certificate of stock does not prevent any tax liability arising from the issuance of shares. It makes sense for any investor to be aware of the taxes due in connection with his investment even if the obligation to pay or to file the tax return does not rest on him.

The original issuance of shares is subject to documentary stamp tax (DST) of P1.00 on each P200 or a fractional part thereof, of the par value of the shares. In case of shares without par value, the amount of DST is based on the actual consideration for the issuance of such shares. As explained in one Bureau of Internal Revenue (BIR) issuance, the DST is imposed on the privilege of issuing shares of stock. The shares are considered issued upon the acquisition of the stockholder of the attributes of ownership over the shares. The entire shares of stock subscribed are considered issued for purposes of the DST, even if not fully paid. Also, as mentioned in another BIR issuance, the obligation to pay the DST attaches upon acceptance of the stockholder’s subscription in the capital stock of a corporation regardless of the physical issuance and delivery to the stockholder of the certificate of stock. Similarly, in the case of Commissioner of Internal Revenue vs. Construction Resources of Asia Inc. and the Court of Tax Appeals, L-68230 dated Nov. 25,1986, the Supreme Court held that the delivery of the certificates of stock to the stockholders, whether actual or constructive, is not essential for the DST to attach. Moreover, receipt of dividends and sale of shares have their own tax implications.

Chandine Kaye P. Villegas is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, National Transfer Pricing Firm of the Year in the Philippines and Tier 1 leading tax transactional firm in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] or [email protected].