BIR Guidance on Tax-Free Exchanges of Properties - Explained
Guest Article: BIR Provides Clarification and Guidance on Tax-Free Exchanges of Properties

Guest Article: BIR Provides Clarification and Guidance on Tax-Free Exchanges of Properties

Posted on April 22, 2022
4 mins read

We are delighted to share a Guest Article from our Partner Law Firm, ZGLaw.

ZGLaw, formerly Zambrano & Gruba, is a full-service law firm representing and advising a wide array of local and foreign clients in the Philippines. In the past years, ZGLaw has been consistently recognized by its peers and legal publications for its Tax practice, as well as its practice in Banking & Finance, Mergers & Acquisition, and Dispute Resolution. In this article, the ZGLaw Team identifies the recent clarifications and guidelines issued by the BIR in relation to tax-free exchanges of properties in the Philippines.

For advice on this topic or in relation to other areas of the law in the Philippines, Contact ZGLaw or email the ZGLaw Team directly at



Republic Act (RA) No. 11534, also known as the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), is a game-changer, as it broadens the enumeration of the tax-free exchange transactions under Section 40(C)(2) of the Tax Code, and provides that prior Bureau of Internal Revenue (“BIR”) confirmation or tax ruling shall not be required in order to avail of the tax exemption.

Despite the earlier issuance of Revenue Regulations (RR) No. 5-2021 which implements the amendments under CREATE law, securing a Certificate Authorizing Registration (“CAR”) for tax-free exchange transactions remains to be a challenge both for the BIR and the taxpayers.

The guidelines under Revenue Memorandum Circular (RMC) No. 19-2022 dated 04 February 2022 seeks to bridge this gap and further simplify the process.


In tax-free exchange transactions, the recognition of gain or loss is merely deferred.  Any gain or loss will only be recognized when the properties or shares are subsequently transferred.

RMC No. 19-2022 dated 04 Feb 2022 seeks to facilitate the issuance of the Certificate Authorizing Registration (CAR) on tax-free exchange transactions without the need for a prior BIR confirmation or ruling.  Further, RMC No. 19-2022 ensures that proper taxes due the Government are protected and collected upon the subsequent sale of the properties.

What Transactions are Covered?

Section 40(C)(2) of the Tax Code, as amended by CREATE law, covers the tax-free exchanges of properties involving (1) reorganization or (2) transfer to a controlled corporation.

The first type of transaction is reorganization, which refers to any of the following:

  1. The merger or consolidation where a corporation exchanges property solely for stock of a corporation which is also a party to the merger or consolidation;
  2. The acquisition of one corporation, in exchange solely for all or a part of its voting stock, or in exchange solely for all or part of the voting stock of a corporation which is in control of the acquiring corporation, of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation, whether or not such acquiring corporation had control immediately before the acquisition;
  3. The acquisition by one (1) corporation of substantially all the properties of another corporation in exchange solely for all or part of its voting stock, or in exchange solely for all or part of the voting stock of a corporation which is in control of the acquiring corporation. In this kind of reorganization, the assumption by the acquiring corporation of the liability of the others shall be disregarded.
  4. Recapitalization, which is an arrangement whereby the stock and bonds of a corporation are readjusted as to amount, income, or priority or an agreement of all stockholders and creditors to change and increase or decrease the capitalization or debts of the corporation or both;
  5. Reincorporation, which means the formation of the same business with the same assets and stockholders surviving under a new charter.

The second type of covered transaction is the transfer to a controlled corporation, which means transfer of property to a corporation by a person, alone or with others, but not exceeding four (4) persons in exchange for stock or unit of participation in such a corporation. As a result of such transfer, the transferor, or transferors, collectively, gains or maintains control of said corporation. 

For purposes of tax-free exchanges of properties, “control” shall mean ownership of majority (at least 51%) of the total voting power of all classes of stocks entitled to vote. The collective, and not the individual, ownership of all classes of stocks entitled to vote of the transferor or transferors shall be used in determining the presence of control.

How to Determine Substituted Basis?

The substituted basis of properties shall be determined as provided for by Section 40(C)(5) of the Tax Code, as amended, as detailed below:


For stock or securities, the substituted basis shall be computed as follows:

Original basis of the property, stock, or securities to be transferred


                        Money received, if any

                        Fair Market Value of other property received, if any


                        The amount treated as dividend of the shareholder, if any

                        The amount of gain that was recognized on the exchange, if any.

Meanwhile, the basis for property received as ‘boot’ shall be its fair market value. “Boot” refers to the money received, and other property received more than the stock or securities received by the transferor on a tax-free exchange.

If the transferee of property assumes a liability of the transferor, such assumption of liability shall be treated as money received by the transferor if such liability is part of the consideration to the exchange.


For property transferred in the hands of the transferee, the substituted basis shall be computed as follows:

            Original basis in the hands of the transferor


            The amount of the gain recognized to the transferor on the transfer.

What is the Original Basis of the Property to be Transferred?

The original basis of the property to be transferred for purposes of computing the substituted basis shall be as follows:

(a). The cost of the property, if acquired by purchase on or after March 1, 1913;

(b). The fair market price or value as of the moment of death of the decedent, if acquired by inheritance;

(c). The basis in the hands of the donor or the last preceding owner by whom the property was not acquired by gift, if the property was acquired by donation. If the basis, however, is greater than the fair market value of the property at the time of donation, then, for purposes of determining loss, the basis shall he such fair market value; or

(d). The amount paid by the transferee for the property, if the property was acquired for less than an adequate consideration in money or money’s worth.

(e). The adjusted basis of (a) to (d) above, if the acquisition cost of the property is increased by the amount of improvements that materially add to the value of the property or appreciably prolong its life less accumulated depreciation.

(f). The substituted basis, if the property was acquired in a previous tax-free exchange under Section 40(C)(2) of the Tax Code of 1997.

How is the Basis for Gain or Loss on the Subsequent Sale or Disposition of Properties Computed?

The substituted basis shall be the basis for determining gain or loss on a subsequent sale or disposition of properties subject of the tax-free exchange transactions.

How is the Substituted Basis of Properties Monitored?

To ensure proper monitoring of the substituted basis, RR  No. 18-2001 requires the parties to the tax-free exchange/reorganization to comply with the following requirements:

  1. A complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization shall be included in the respective returns (for the taxable year within which the reorganization occurred) of the following:
    • Each corporation which is a party to the reorganization; and
    • Every taxpayer, other than a corporation, party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization.
  2. The parties shall include as a note to their respective audited financial statements for the taxable year in which the exchange occurred a statement to the effect that they hold such assets/shares acquired in a tax-free exchange and the year in which such exchanged occurred, and in the taxable years until the subject properties are subsequently transferred to another transferee.
  3. The parties shall cause to annotate, at the back of certificates of title and/or stock, the date the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of stock transferred, and the fact that no gain or loss was recognized as a result of such exchange.
  4. Within ninety (90) days from the date of the receipt of the CAR, a photocopy of such certificates of title and/or stock bearing the annotation of substituted bases of the real properties/shares of stock transferred/received in connection with the transaction, as duly certified by the Register of Deeds/Corporate Secretary, should be submitted to the Revenue District Office (“RDO”) which issued the CAR. Otherwise, the RDO shall refer the docket of the case to the Legal Division for appropriate action.
  5. The shareholders of the absorbed/transferor corporation and the surviving transferee corporation shall record in their respective books the mandatory accounting entries as prescribed by the regulations.

What is the Tax Treatment of Exchanges Made Pursuant to Section 40(C)(2) of the Tax Code, As Amended?

The transfers of properties in exchange for stocks shall be exempt from Capital Gains Tax (CGT), Creditable Withholding Tax (CWT), Income Tax (IT), Donor’s Tax (DT), Value-Added Tax (VAT), and Documentary Stamp Tax (DST) on conveyances of real properties and shares of stock.

However, the original issuance of shares in exchange for properties transferred shall be subject to DST (Section 174, Tax Code, as amended).

Where is the Venue for the Issuance of the CAR?

The parties to the transaction shall submit the documentary requirements to the RDO having jurisdiction over the place where the property is located, in case of a real property, or in case of shares of stock, the RDO where the issuing corporation is registered.

If the transaction involves transfer of multiple real properties and/or shares of stocks situated in various locations covered by different RDOs, the CAR shall be processed with the RDO having jurisdiction over the place where the transferee corporation is registered.

When does RMC 19-2022 take effect?

RMC 19-2022 has been effective since 04 February 2022.

About ZGLaw – Zambrano Gruba Caganda and Advincula Law

ZGLaw was founded in 1993 by the late Daisy G. Zambrano and Lily K. Gruba. Starting out as the legal department of a commercial bank, the practice quickly grew into litigation and labor. Lily served in government as Undersecretary for the Department of Finance in 1998. The tax and corporate practice was then established and continued to grow, with the Firm handling many landmark cases for local airlines, banks and real estate companies. Recently the Firm has been recognized for its M&A and transactional advisory work.

In 2017, ZGLaw formed an alliance with WongPartnership to become a member of the WPG Law Network. The WPG Law Network brings together a group of five prominent law firms across seven countries in a collaboration to provide clients with legal services in ASEAN, China and the Middle East.

ZGLaw continues to grow in size and in its practice fields whilst keeping its core values of excellence, diligence, innovation and service foremost.

For more information about ZGLaw or if you require legal services for your business here in the Philippines, visit and contact the ZGLaw Team directly.

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DISCLAIMER: This article is strictly for general information purposes only. Nothing in this article constitutes or intends to constitute financial, accounting, regulatory or legal advice and must not be used as a substitute for professional advice. It is still necessary to consult your relevant professional adviser regarding any specific matter referenced above.

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