SEC issues draft implementing rules for FIST law

The Securities and Exchange Commission (SEC) has drafted the implementing rules of the law that would help financial institutions dispose of their bad loans through asset management companies.

The corporate regulator on Friday said it is seeking public comments on the draft implementing rules and regulations (IRR) for Republic Act No. 11523, otherwise known as the Financial Institutions Strategic Transfer (FIST) Act.

“The State recognizes the role of banks and other financial institutions as mobilizers of savings and investments and in providing the needed financial system liquidity to keep the economy afloat. Thus, it is essential that banks and other financial institutions are able to maintain their financial health in order to cushion the adverse economic impact of the COVID-19 pandemic,” the proposed rules stated.

The FIST law is applicable to financial institutions’ assets that have become non-performing on or before Dec. 31, 2022.

The IRR covers the creation of a FIST Corporation (FISTC), which will invest in or acquire non-performing assets (NPA) of financial institutions, as well as the submission of its plans and the process of transferring these assets.

Under the rules, a FISTC is a stock corporation, and cannot be allowed to incorporate as a one-person corporation.

“Provided, further, that if the FISTC will acquire land, at least sixty percent (60%) of its outstanding capital stock shall be owned by Philippine nationals as defined under the FIA (Foreign Investment Act),” it said.

Since these corporations are vested with public interest, FISTCs need to have independent directors on the board, appoint a compliance officer and submit compensation and performance reports.

Applications for the registration of a FISTC should be filed with the SEC within 36 months from the effectivity of the FIST law. However, no tax incentives will be granted to FISTCs established between the 25th and 36th month of the law’s effectivity.

An FISTC will have a minimum authorized capital stock of P500 million, with a minimum subscribed capital stock of P125 million and a minimum paid-up capital of P31.25 million (in cash).

The company should submit to the SEC its plan that includes its investment policies, contribution plan, features of its investment unit instruments (IUIs) and other details.

Under the rules, IUIs are not considered as deposit substitutes, which means the interest will not be subjected to a 20% final withholding tax.

“However, the IUI and any income arising from the IUIs shall be subject to the normal income tax and/or such other applicable taxes, including but not limited to, documentary stamp tax,” it said.

Investors may acquire IUIs in a FISTC for a minimum of P10 million. However, parent firms, subsidiaries, affiliates, and directors of the selling financial institutions (FI) cannot acquire, directly or indirectly, the IUIs of the FISTC that acquired the former’s non-performing assets.

The rules also cover the transfer of non-performing assets to a FISTC, as well as tax exemptions and fee privileges for covered transactions.

“The FISTC shall be exempt from income tax on net interest income arising from new loans in excess of existing loans, which are extended to a borrower with NPL that has been acquired by the said FISTC from an financial institution within a period of not more than two years from the date of effectivity of the Act,” the draft rules stated.

The Finance department and the Bureau of Internal Revenue are also finalizing revenue regulations covering the tax exemptions for certain transactions.

The SEC’s draft IRR also includes a section on net operating loss carry-over (NOLCO) of financial institutions that have disposed of their non-performing assets.

“Any loss that is incurred by an FI as a result of transferring its NPA to an FISTC within a period of not more than two years from the date of effectivity of the Act, excluding accrued interests and penalties receivable, and which had not been previously offset as deduction from gross income, shall be treated as ordinary loss, and may be carried over as a deduction from its taxable gross income for a period of five (5) consecutive taxable years immediately following the year of the transfer that resulted to such loss,” it stated.

Any tax savings from this cannot be used by the financial institution for dividend declaration. — K.C.G.Valmonte