Manalo Puno Jocson & Guerzon Law Office

January 15, 2008 BIR RULING [DA-011-08] Secs. 27 (D) (5) & 39 (A) (1); DA-578-2007 dtd 11/07/07 Manalo Puno Jocson & Guerzon Law Office 5/F Valero Tower, 122 Valero Street Salcedo Village, Makati City Attention: Maria Rachel V. Riego De Dios and Jaypee Orlando C. Pedro Gentlemen : This refers to your letter dated December 18, 2007, requesting in behalf of your client, Silverman Holdings, Inc . (Silverman, for short), a confirmation of your opinion that the conveyance of Silverman of its parcel of land treated as its investment is a capital asset and would therefore be subject to 6% capital gains tax. It is represented that as stated in its Articles of Incorporation and current Financial Statements, Silverman is a holding company; that it is engaged in the business of investments of different kinds; that your client acquired the subject land as an investment and subsequently entered into a Joint Venture Agreement on 05 September 2006 with Nuvoland Philippines, Inc. (Nuvoland, for short) so that the subject land can be developed into a mixed-use high rise building (the "Project"); that before any construction was undertaken, Silverman re-negotiated with Nuvoland that it be paid wholly in cash as consideration for its conveyance of the subject land since Silverman is not in the realty business; that a Supplemental Agreement was executed between the parties on October 9, 2007 wherein it was stated that Silverman, as the landowner, shall convey and transfer ownership over the land to Nuvoland for purposes of the Project; that as consideration for the subject land, Silverman shall be paid in cash payable on installment basis; that since Silverman is a holding company, not engaged in the real estate business, it is your opinion that the sale of land qualifies as a sale of capital asset subject to the 6% capital gains tax (CGT); that the CGT would thus be based on the gross selling price or the current fair market value, whichever is higher, as determined in accordance with Section 6 (E) of the Tax Code. ( Section 27 [D] (5), Tax Code ); that since the initial payments in the first year of sale will exceed 25% of the selling price, the sale shall be treated as a cash sale and the 6% CGT will be due within 30 days from the execution of the deed of conveyance. ( Section 49 [B] (2), Tax Code ; that in this case, the taxpayer is required to report the gain on cash basis. Hence, your request. HaECDI In reply thereto, please be informed that Section 27 (D) (5) of the Tax Code of 1997, as amended, as implemented by Revenue Regulations No. 7-2003, provides (5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings . A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of this Code, whichever is higher, of such lands and/or buildings." It is undisputed that the yardstick for determining whether the property is capital asset or ordinary asset is the actual use of the said property. Thus, if the property is not actually used in trade or business of the taxpayer, whether or not connected with his trade or business, or not held for lease or sale to customers, it will be classified as a capital asset. Moreover, if the property is merely held for investment purposes and remains vacant and idle, it is deemed a capital asset. cCSTHA This is fortified in BIR Ruling No. 014-2003 dated October 28, 2003 , where this Office ruled that "It is apparent under the foregoing provision that for a property to be considered an ordinary asset it must be actually used in the business of the corporation. Accordingly, on the condition that Wendell Holdings Co., Inc. is not habitually engaged in the real estate business as represented, the property under consideration is a capital asset. The property was neither held primarily for sale to customers nor actually used in the business of Wendell Holdings Co., Inc. . . . The property is not actually used in the business of Wendell Holdings Co., Inc. as it has remained idle and undeveloped. Therefore, the sale of the property under consideration is a sale of a capital asset, not an ordinary asset. As such, the transaction is subject to capital gains tax of 6% under Section 27 (D) (5) and not to the creditable withholding tax." The phrase " taxpayers engaged in the real estate business " refers collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term " taxpayers not engaged in the real estate business " shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of these Regulations. [Sec. 2 (g), Revenue Regulations No. 7-2003] Inasmuch as Silverman is not primarily engaged in real estate business, but is merely a holding company organized to acquire, purchase, own or hold for investment or otherwise shares of stock, bonds and other securities of any corporation or entity, it is deemed not engaged in the real estate business. Consequently, the sale of the aforesaid property is deemed a sale of capital asset subject to the 6% final capital gains tax but not subject to the 12% VAT. Moreover, real property, which is idle and vacant and had not been used in the ordinary course of trade or business nor had it ever been classified as property of a kind which would properly be included in the inventory if on hand at the close of the taxable year, nor had it ever been held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, the income derived from the sale thereof is not subject to the expanded withholding tax under Section 2.57.2 (J) of Revenue Regulations No. 2-98, but only to the 6% capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the same Code, based on the gross selling price or fair market value (FMV) as determined in accordance with Section 6 (E) of the Code, whichever is higher. Lots or improvements, classified as "investment properties" which are idle, unproductive and unimproved since the time of acquisition, and do not fall under any of the assets enumerated under Section 39 (A) (1) of the Tax Code of 1997, as amended, and 2 (b) of Revenue Regulations No. 7-2003 are classified as capital assets, the sale of which is subject to 6% capital gains tax, DST of 1.5% but exempt from 12% VAT. ( BIR Ruling No. DA-152-04 dated March 31, 2004 ) aIcDCA Accordingly, we hereby confirm your opinion that the sale of the abovementioned property which has long remained idle and considered as capital asset is: (1) subject to the capital gains tax of 6% pursuant to Section 27 (T) (5) of the Tax Code of 1997, as amended; (2) subject to DST at the rate of P15.00 for each P1,000.00 or fractional part thereof in excess of P1,000.00, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196 of the Tax Code of 1997, as amended; and (3) exempt from 12% VAT, the property not being primarily held and offered for sale or lease to customers in the ordinary course of Silverman's trade or business, as provided under Section 109 (w) of the Tax Code of 1997, as amended. ( BIR Ruling No. DA-270-04 dated May 17, 2004 ) TCcIaA This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, however, it is disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service