BIR Ruling [DA-075-97]

February 24, 1997 BIR RULING [DA-075-97] First Sarmiento Property Holdings, Inc. 2nd Floor, Sarmiento Building II 2316 Pasong Tamo Extension Makati City Attention: Ms . Perla C . Arana VP-Finance & Administration Gentlemen : This refers to your letter dated December 23, 1996 in effect, requesting for a ruling on the tax implications of the declaration and distribution of property dividends by First Sarmiento Property Holdings, Inc. (FSPHI) to its stockholders of record as of November 30, 1996. LLjur It is represented that FSPHI is a domestic corporation with an authorized capital stock of Fifty Million Pesos (P50,000,000.00) divided into Fifty Million (50,000,000) shares with a par value of One Peso (P1.00) per share; that its subscribed capital stock in the amount of Thirty Five Million One Hundred Ninety Five Thousand Four Hundred Thirty Pesos (P35,195,430.00) is fully paid; that the stockholders of FSPHI with their respective stockholdings are as follows: Amount Subscribed Stockholders and Paid-Up Rogelio M. Sarmiento P1.00 Angelito M. Sarmiento 1.00 Danilo P. Sarmiento 1.00 Pablo S. Sarmiento 1.00 Lydia S. Enrile 1.00 Ma. Luz S. Roxas 1.00 Sarphil Corporation 706.00 Sarmiento Management Corp. 14,264,000.00 P. S. Sarmiento & Sons 12,131,862.00 Sarmiento Securities Corp. 8,798,856.00 T o t a l P35,195,430.00 =========== that as of October 31, 1996, it has a total unappropriated retained earnings of Fifteen Million Seventy Two thousand Seven Pesos (P15,072,007.00); that at the meeting of its Board of Directors on December 3, 1996, a resolution was approved declaring and distributing as property dividend assets with an aggregate book value of Eleven Million Two Hundred Twenty Two Thousand Seven Hundred Two Pesos (P11,222,702.00); that the real properties declared as property dividends are assets no longer intended to be used in the primary business of the corporation and consist mainly of idle agricultural lands and an office building minimally used as office of the corporation, namely: Area TCT/TC No. (sq. m.) Book Value Location 1. 205409 4,002 P8,639,940.00 Pasong Tamo Ext., Makati City 2. T-259897 (M) 243,100 589,911.00 Marilao, Bulacan 3. T-257301 (M) 170,756 801,937.00 Marilao, Bulacan 4. T-257311 (M) 172 327.00 Marilao, Bulacan 5. T-257312 (M) 25,248 48,510.00 Marilao, Bulacan 6. T-257313 (M) 19,546 37,555.00 Marilao, Bulacan 7. T-257314 (M) 55,752 107,119.00 Sam Jose del Monte, Bulacan 8. T-257315 (M) 43,813 84,180.00 Marilao Bulacan 9. T-257320 (M) 9,096 92,541.00 Marilao, Bulacan 10. T-257321 (M) 9,369 95319.00 Marilao, Bulacan 11. T-257322 (M) 9,645 98,127.00 Marilao, Bulacan 12. T-257323 (M) 9,700 98,686.00 Marilao, Bulacan 13. T-257324 (M) 8,352 84,972.00 Marilao, Bulacan 14. T-257325 (M) 9,932 101,046.00 Marilao, Bulacan 15. T-257326 (M) 9,889 100,609.00 Marilao, Bulacan 16. T-257327 (M) 5,880 59,822.00 Marilao, Bulacan 17. T-257328 (M) 7,927 80,648.00 Marilao, Bulacan 18. T-257329 (M) 9,972 101,453.00 Marilao, Bulacan Total P11,222,702.00 ============= and that after declaring the aforementioned properties as property dividends, FSPHI shall still be retaining ownership of the other lands which are bigger in area than the said real properties declared as property dividends. Base on the foregoing premises, you now request 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 FSPHI, and FSPHI's stockholders can record in their books the dividends thus received at the same book value. "2. The real property dividend which shall be received by the stockholders of FSPHI shall be subject to a final withholding tax of zero percent (0%) if received by individuals, and exempt from income tax and, consequently, from withholding tax if received by domestic corporations. The receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of these properties as property dividends pursuant to Secs. 21(c)(2) and 24(e)(4) of the Tax Code, as amended by Executive Order No. 37, respectively. "3. FSPHI shall not be subject to any income or capital gains tax on the difference between the fait market value and the book value of the real 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. "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 book value at the time of the dividend distribution. "5. The amount of the documentary stamp tax on the Deeds of Conveyance/Assignment to be executed between FSPHI and the recipient stockholders covering the real property declared as property dividends shall be based on the book value of the said real properties. 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 property declared as dividends under Section 196 of the Tax Code as amended. The documentary stamp tax shall be due and payable on the day of execution of the Deeds of Conveyance/Assignment under Section 173 of the said Code." 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 FSPHI, and FSPHI'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 stockholders of FSPHI 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 FSPHI 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 No. 276-91, December 26, 1991); (4) 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 at the time of the dividend distribution. (5) That the documentary stamp tax on the Deeds of Conveyance to be executed by FSPHI 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 estate 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 properties 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 properties in favor of the transferee recipient stockholders 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)