BIR Ruling [DA-012-06]

January 20, 2006 BIR RULING [DA-012-06] 27 (D) (5); DA155-05 Arstate International Corporation 581 Wack-Wack Road Mandaluyong City Attention: Mr. Marcos B. Aragon Gentlemen : This refers to your letter dated November 3, 2005 requesting for confirmation of your opinion that your sale of a condominium unit which has long been idle is subject to the six percent (6%) capital gains tax under Section 27(D)(5) of the Tax Code of 1997. It is represented that ARSTATE INTERNATIONAL CORPORATION (ARSTATE),is a domestic corporation duly registered with the Securities and Exchange Commission (SEC);that ARSTATE is the registered owner of a condominium unit at 101 Court Felicidad 1 Condominium together with three (3) parking areas situated in Mandaluyong City covered by Condominium Certificate of Title (CCT) No. 4288 issued by the Registry of Deeds for Mandaluyong City; that the financial restructuring package of ARSTATE called for the sale of the idle property to Vina Elisa C. Bote by virtue of a Deed of Absolute Sale executed on August 22, 2005; and that the capital gains tax and the corresponding documentary stamp tax due on the said sale had been paid in the respective amounts of P231,240.00 and P57,810.00. In reply, please be informed that pursuant to Section 27(D)(5) of the Tax Code of 1997, 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 land and/or buildings which are actually not used in the business of a corporation and are treated as capital assets, based on the gross selling price, or fair market value, whichever is higher. This rule applies, whether or not the seller-corporation is engaged in the real estate business. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, shall apply. The rate of withholding tax will depend on whether, first, the seller is exempt or taxable; second, whether the seller is habitually engaged in real estate business or not; and third, if the seller is habitually engaged in real estate business, the gross selling price, as the term is defined in the above-mentioned Revenue Regulations. ( BIR Ruling No. DA-152-04 dated March 31, 2004; BIR Ruling No. 27-02 dated-July 3, 2002 ). HTCaAD Based on your representation, the income from the sale of the condominium unit located in Mandaluyong City which has long been idle and was never intended to be sold or lease in the ordinary course of business nor 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 held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, but which was merely previously used by its operating company, ARSTATE, is not subject to the expanded withholding tax under Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended, 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 supra, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher. ( BIR Ruling No. DA-217-99 dated April 12, 1999; BIR Ruling No. DA-010-02 dated January 29, 2002 ) Corollarily, only such real properties held primarily for sale or lease to customers in the ordinary course of business, or which would be properly included in the inventory of such taxpayer if on hand at the close of the taxable year, or used in his trade or business, are appropriately classified as ordinary assets. Otherwise stated, real properties other than those enumerated under Section 39(A)(1) of the Tax Code of 1997 and Section 2(b) of Revenue Regulations No. 7-2003 were properly deemed as capital assets. Considering that the condominium unit has long been idle and has never been leased out by ARSTATE, and does not fall under any of the assets enumerated under Sections 39(A)(1) of the Tax Code of 1997 and 2(b) of Revenue Regulations No. 7-2003, the same should be properly classified as a capital asset for tax purposes. ( BIR Ruling No. DA-060-03 dated March 03, 2003 ) SUCH BEING THE CASE, this Office hereby confirms your opinion that the sale of the above-mentioned property which has long remained idle and does not fall under any of the assets enumerated under Sections 39(A)(1) of the Tax Code of 1997 and 2(b) of Revenue Regulations No. 7-2003 be considered as capital assets and, is subject to the capital gains tax of 6% pursuant to Section 27(D)(5) of the Tax Code of 1997 and to the corresponding documentary stamp tax at the rate of P15.00 for each P1,000 or fractional part thereof in excess of P1,000, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196 supra . This ruling is being issued on the basis of the foregoing facts as represented. However, if upon, investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. ICAcHE Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service