BIR Ruling [DA-113-04]

March 12, 2004 BIR RULING [DA-113-04] Ma. Veronica C. Jamora Cor. S.L. Drive & Balmori Streets San Lorenzo Village Makati City M a d a m : This refers to your letter dated February 20, 2004 stating that the Sta. Clara Real Estate Lessors, Inc. applied with the Securities and Exchange Commission (SEC) for an increase in its capitalization through a tax free exchange of properties under Section 40(C)(2) and (6)(c) of the Tax Code of 1997 in exchange for shares of stock; that the property transferred is residential in nature as per Tax Declaration classification; that the value of the property as per its Tax Declaration is P25,040,000.00; and that the incorporators in its board resolution decided to sell the aforesaid property consisting of land and improvements to finance various projects of the said corporation. Based on the foregoing representations, you now request for an opinion that since the property subject of the proposed sale is residential in nature, which is classified as capital asset, it is subject to the 6% final capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997. In reply thereto, please be informed that Section 3(f)(3) of Revenue Regulations No. 7-2003 provides as follows: "(f) Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules: (1) . . . (2) . . . (3) The real property received in an exchange shall be treated as ordinary asset in the hands of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business, or a taxpayer who, even if not engaged in real estate business, will use in business the property received in the exchange." Corollarily, Section 4(c)(ii) of said Regulations provides that the sale of land and/or building classified as ordinary asset and other real property (other than land and/or building treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be subject to the creditable withholding tax (expanded under Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended, and consequently, to the ordinary income tax under Section 27(A) of the Tax Code of 1997. . . . . IN VIEW OF THE FOREGOING, this Office holds that the proposed sale by Sta. Clara Real Estate Lessors, Inc. of its parcel of land together with the improvements thereon which was acquired through a tax-free exchange transaction and is classified as residential is considered as an ordinary asset subject to the corresponding withholding tax based on the gross selling price or current fair market value as determined in Section 6(E) of the Tax Code of 1997. 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. HAECID Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group