Republic Act No. 11523, also known as the “An Act to Ensure the Resilience of the Philippine Financial Sector Against the COVID-19 Pandemic” (FIST Act)1, which aims to assist banks and financial institutions (FIs) to cope with the harmful effects of the COVID -19 pandemic, took effect on February 18, 2021 upon its publication in the Official Journal and in a newspaper with wide circulation. This law provides a legal framework for the full transfer of bad debts and bank assets by allowing them to clean up their books and redirect their resources to improve the liquidity of the financial system.

The Securities and Exchange Commission (SEC), together with the Bangko Sentral ng Pilipinas, the Ministry of Finance, the Internal Revenue Bureau and the Land Registration Authority, are responsible for issuing the implementing rules and regulations within 30 days from the date of entry into force of the law. .

Repeal of the Special Purpose Vehicles Act 2002

The main mechanism provided by the FIST Act is to authorize the creation of special purpose companies, known as Financial Institutions Strategic Transfer Companies (FISTC). The law then provides tax and other incentives for FISTCs, as well as for the transfer of non-performing assets (NPAs) to and from these FISTCs.

The FIST Act repeals Republic Act No. 9182, as amended, or the Special Purpose Vehicles Act of 2002 (SPV Act). The SPV Act was passed to help banks get rid of their NPAs in the aftermath of the Asian financial crisis by providing a legal framework for doing so and granting tax incentives. However, banks have stopped creating SPVs under the SPV Act as the transactions no longer qualify for the incentives. The law provided limited periods for transfers to or by SPVs to benefit from the incentives and these periods have now expired.

The FIST law is substantially the same as the SPV law with regard to the creation and powers of the ad hoc company, the conditions for disposing of the NPAs and the incentives granted at the various stages of the operations envisaged.

SPVs created under the SPV Act may benefit from the privileges and incentives granted under the FIST Act.

How to set up a FISTC

A FISTC must be a corporation with the power to invest in or acquire NPAs from FIs and engage third parties to manage, operate, collect and dispose of NPAs acquired from FIs, among other powers.

A FISTC must be established within 36 months of the FIST Act coming into effect (or by February 2024).

A FISTC must also submit a FISTC plan to the SEC within the time period prescribed by the SEC. Once the FISTC plan is approved by the SEC, the FISTC would be authorized to sell and distribute investment unit instruments in accordance with the FIST Act.

Tax incentives

The transfer of NPA from an FI to an FISTC, and from an FISTC to a third party, or a giving in payment by the borrower or by a third party in favor of an FI or a FISTC, is exempt from taxes following, where applicable: (a) documentary stamp duty; (b) capital gains tax on the sale of certain fixed assets, or creditable withholding tax on income from the sale of ordinary assets; and (c) value added tax.

Such transfers are also subject to reduced fees on the following: (a) registration and transfer fees on the transfer of the immovable mortgage and security to and from FISTC; (b) filing fees for any seizure initiated by the FISTC in relation to any NPA acquired from an FI; and (c) land registration fees.

Incentives are time-limited. For example, transfers of NPAs from FIs to a FISTC must be made within two (2) years of the entry into force of the FIST Act, while transfers from a FISTC to third parties enjoy a window of five (5) years from the acquisition of the NPAs. dispose of the same with incentives.

The FIST Act also grants tax exemptions and privileges to FISTCs, including exemption from income tax, documentary stamp duty, and mortgage registration fees on certain new loans. FISTCs are also exempt from documentary stamp duty when providing capital to a borrower with non-performing loans.

FIST Act c. SPV Law

As the FIST law mirrors the provisions of the SPV law, it remains to be seen whether this measure will be more effective than the previous one in solving the financial sector’s problems with non-performing assets.

A provision of the FIST Act that may provide relief to FIs and FISTCs is the prohibition on issuing injunctions by courts, other than the Supreme Court and the Court of Appeal, against certain transfers of assets involving FISTCs and participating FIs. This provision was not included in the SPV law.

Another factor favoring this new measure is that it will operate under a different insolvency regime, the Financial Rehabilitation and Insolvency Act, which provides more options and speeds up the rehabilitation of distressed businesses. The SPV Act operated under the Insolvency Act, an archaic legal framework passed in 1909.

Like the SPV law, the period for establishing a FISTC and the incentives provided by the FIST law remain limited in time. FIs may view this as a negative feature of the law, given the slow legal process in the country and the various approval and regulatory requirements to establish and operate an FISTC and to transfer assets.