BIR Ruling [DA-072-05]

March 3, 2005 BIR RULING [DA-072-05] DA 353-03 Joncor Management and Development Corporation 1362 A. Mabini Street, Ermita Manila Attention: Mr. Anthony C. Syquia Gentlemen : This refers to your letter dated November 25, 2004 stating that the Joncor Management and Development Corporation (JONCOR) stopped its commercial operations and was voluntarily dissolved on June 30, 2004 and is now under liquidation pursuant to the Corporation Code of the Philippines; that consequently, Mr. Anthony C. Syquia was appointed trustee on June 30, 2004; and that the stockholders of record have agreed to liquidate the said corporation and plan to distribute the remaining properties of JONCOR to its stockholders as return of their investment. In connection therewith, you now request confirmation of your opinion that the transfer of the remaining properties by JONCOR to its stockholders in the form of liquidating dividends is not subject to income tax, capital gains tax, value-added tax and the corresponding documentary stamp tax. In reply thereto, please be informed that the above transfer of property in favor of the stockholders of JONCOR as liquidating dividends is not subject to the corporate income tax imposed under Section 27(A) or to the capital gains tax imposed under Section 27(D)(5) both of the Tax Code of 1997, as amended, and consequently, to the withholding tax imposed under Revenue Regulations No. 2-98, as amended. The transfer by the liquidating corporation of its assets to its stockholders is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in a partial or complete liquidation, and consequently, the liquidating corporation is not liable for income tax for said transaction. ( BIR Ruling No. 039-02 dated November 11, 2002 cited in BIR Ruling No. DA-174-03 dated June 3, 2003 ) Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial redemption. (BIR Ruling No. 171-92 dated May 28, 1992) On the other hand, shareholders of the corporation may realize gain or loss on their receipt of liquidating dividends from the dissolving corporation. The gain or loss is measured by the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shareholdings in the said corporation. Thus, since JONCOR has accumulated a negative surplus of P1,481,090.25 and its capital impaired as shown in its Financial Statements as of December 31, 2003, the shareholders of the said corporation realized losses on their investments. HIAEaC Accordingly, JONCOR is not liable for income tax on either the transfer of its assets to its stockholders, or on its receipt of the shares surrendered by the shareholder. (BIR Ruling No. 039-02 dated November 11, 2002) Neither would the conveyance by JONCOR of its real properties to its stockholders to the extent that such transfer represents the return of the stockholders' investments in the said corporation, be subject to any income tax and consequently, to the creditable withholding tax of 6% imposed under Section 3(J) of Revenue Regulations No. 6-2001, as amended by Revenue Regulations No. 12-2001, implementing Section 57(B) of the Tax Code of 1997. Such transfer is not considered a sale of its assets. Hence, JONCOR, as the liquidating corporation, and the shareholders do not realize gain or loss as the case may be, in complete liquidation to the extent that the conveyance is without any consideration, but a return of shareholders capital which is not subject to tax. On the other hand, pursuant to Section 189 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations," a conveyance of real estate by a corporation without valuable consideration to an owner of all its capital stock in consequence of its dissolution is not subject to tax . Under this provision, a distribution in liquidation of the assets of a corporation consisting of real estate, without valuable consideration, is not subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended. The distribution of the assets of the corporation to its stockholders in liquidation of the business without consideration is viewed as a return of capital to the shareholders. Considering this, the provision of Section 196 of the Tax Code of 1997, as amended, shall not apply. Thus, it has been held that a corporation that distributes its assets to its shareholders as liquidating dividends is not deemed to be selling such assets to the latter. Accordingly, the transfer by JONCOR of its properties to the stockholders, in proportion to their respective shareholdings, shall not be subject to DST imposed under said Section 196 of the Tax Code, as amended. The notarial certification on the deed of assignment is, however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Tax Code. Finally, the stockholders who sell the real property received by them as liquidating dividends which are capital assets immediately after title thereto is transferred to their name are subject to the final capital gains tax imposed under Section 24(D)(1) of the Tax Code, as amended, in the case of individual distributees and Section 27(D)(5) thereof, in the case of corporate distributees. It bears emphasis, however, that prior to dissolution, the Bureau must investigate and determine that JONCOR has no outstanding tax obligation, and if it has, the same must be settled fully before it can dissolve and distribute its remaining assets to its stockholders. 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. IHCacT Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group