BIR Ruling [DA-074-97]

February 24, 1997 BIR RULING [DA-074-97] Phil-American Poultry Breeders, Inc. Cay Pombo, Sta. Maria, Bulacan Attention: Mr . Armando B . Escobar Treasurer Gentlemen : This refers to your letter dated December 16, 1996 in effect, requesting for a ruling on the tax implications of the declaration and distribution of property dividends of Phil-American poultry Breeders, Inc. (PAPBI) to its stockholders, among others, Vitarich Corporation. cdll It appears that Phil-American Poultry Breeders, Inc. (PAPBI) is a domestic corporation with an authorized capital stock of Twenty Million Pesos (P20,000,000.00) divided into Two Million (2,000,000) shares with a par value of Ten Pesos (P10.00) per share; that its subscribed capital stock in the amount of P15,000,000.00 is fully paid; that as of December 31, 1995, the Company has a total unappropriated retained earnings of Eighteen Million Eight Hundred Fifty Seven Thousand Two Hundred Twenty Pesos (P18,857,220.00); that at the meeting of its Board of Directors on December 9, 1996, a resolution was approved declaring and distributing as property dividends several parcels of land with an aggregate book value of Five Million Nine Hundred Twenty Three Thousand Two Hundred Sixty Four and 23/100 Pesos (P5,923,264.23) in addition to cash dividends; that the real properties declared as property dividends are assets that are minimally used by the company; that these several parcels of land are adjacent to each other and covered and described under TCT Nos. 94.166 (M), 94.167 (M), 94.169 (M), 94.811 (M), 94.812 (M), 94.813 (M), 94.814 (M), 94.815 (M), 94.816 (M), 94.817 (M), 94.818 (M) and 94.889 (M) with an aggregate area of 23.2 hectares, all located at Sta. Maria Bulacan; and that Vitarich Corporation, one of the stock holders of said corporation, holds fully paid shares of stock in the amount of Twelve Million Five Hundred Eighty Nine Thousand Two Hundred Fifty Pesos (P12,589,250.00). Based on the foregoing premises, you now request for confirmation of your opinion that: "1. The real estate properties declared as dividends can be recorded at their respective book value in the books of PAPBI, and PAPBI's stockholders can record in their books the dividends thus received at the same book value; (BIR Ruling No. 276-91, December 26, 1991); "2. The real property dividend which shall be received by the stockholder of PAPBI shall be subject to a final withholding tax of zero percent (0%) if received by individuals, and exempt from income tax if received by domestic corporation pursuant to Executive Order No. 37 which took effect on August 1, 1986. "3. PAPBI shall not be subject to any income or capital gains tax on the difference between the fair market value and the book value of the real estate properties declared and distributed as property dividends, since there is no realized gain considering that the value used at the time of distribution is the book value. (BIR Ruling, Ibid) "4. Upon subsequent sale or other disposition of the property received as dividend by the stockholders, the basis of such sale or disposition shall also be its books value at the time of the dividend distribution. "5. The amount of the documentary stamp tax on the Deeds of Conveyance to be executed by PAPBI and the recipient stockholders covering the real property declared as property dividends shall be based on the book value of the said real properties and that the documentary stamp tax will be imposed at the rate of P15.00 for every One thousand pesos (P1,000.00) or fractional part thereof, of the book value of the real properties declared as dividends pursuant to Section 196 of the Tax Code as amended." In reply thereto, please be informed as follows: (1) That the real estate properties declared as dividends can be recorded at their respective book value in the books of PAPBI, and PAPBI's stockholders can record in their books the dividends thus received at the same book value; (BIR Ruling No. 276-91, December 26, 1991); (2) That the real property dividend which shall be received by the stockholder of PAPBI shall be subject to a final withholding tax of zero percent (0%), and the receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of these real estate properties as property dividend; (3) That PAPBI shall not be subject to any income or capital gains tax on the difference between the fair market value and the book value of the real estate properties declared and distributed as property dividend, since there is no realized gain considering that the value used at the time of distribution is the book value. (BIR Ruling No. 276-91, December 26, 1991); (4) That upon subsequent sale or other disposition of the property received as dividend by the stockholders, the basis of the taxation of the subsequent sale or disposition shall also be the fair market value time of the dividend distribution. (5) That the documentary stamp tax on the Deeds of Conveyance to be executed by PAPBI and the recipient individual stockholders covering the real estate properties declared as property dividends shall be based on the book value of the said real properties at the rate prescribed under Section 196 of the Tax Code, as amended by R.A. No. 7660. The documentary stamp tax shall be due and payable on the day of execution of the Deed of Conveyance (Section 173, Tax Code, as amended). (BIR Ruling Nos. 80-89 and 108-93 dated March 16, 1993) Moreover, the book value of the property dividend (real property) must be annotated at the back of the Transfer Certificate of Title of the real property which shall serve as the basis of the computation of the tax upon its subsequent disposition (BIR Ruling Nos. 108-93 dated March 16, 1993; 498-93 dated December 20, 1993). It is understood, however, that while the declaration of the subject real property as dividend is exempt from income tax, the transfer thereof to stockholders shall be subject to 10% value added tax pursuant to Section 100 of the Tax Code, as amended by Republic Act No. 7716, as implemented by Revenue Regulations No. 7-95, as amended. The tax clearance certificate authorizing the registration of the real property in favor of the transferee recipient stockholder by the Register of Deeds concerned, without payment of the capital gains tax, shall be secured from the Revenue District Officer (RDO) of the Revenue District where the corporation declaring the dividends is registered, but subject to proof of payment of the value added tax. (Revenue Regulations No. 11-96) 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. cdtech Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)