BIR Ruling [DA-161-06]

March 27, 2006 BIR RULING [DA-161-06] Section 196; DA-504-05 Aranas Consunji & Barleta Law Office Unit 106 G/F Le Metropole Condominium Tordesillas Corner Dela Costa Sts. Salcedo Village, Makati City Attention: Atty. Ma. Louella M. Aranas Gentlemen : This refers to your letter requesting on behalf of your client, Pan Pacific Industrial Sales Co., Inc. (hereinafter PANPISCO) for confirmation of your opinion that the receipt by The Stockholders of PANPISCO, of its distributive share in the form of condominium units and parking spaces in The Greenbelt Parkplace Project (GPP) is not subject to income or withholding tax, documentary stamp tax and the value added tax. It is represented that PANPISCO is a domestic corporation duly organized and existing under Philippine laws; that On August 9, 2001, PANPISCO and Megaworld entered into a Memorandum of Agreement (MOA) for the construction of a mixed use commercial and residential condominium building, otherwise known as Greenbelt Parkplace (GPP); that the land was then owned by PANPISCO and Megaworld undertook the construction; that sometime in March 2006, the said land was declared as property dividend to the stockholders of PANPISCO (hereinafter "The Stockholders").; that later, an Addendum to the Memorandum of Agreement, executed by and between the same parties confirmed that PANPISCO can assign its rights, interests, participation or title under the MOA; that on the basis of this confirmation, the parties to the MOA are Megaworld and The Stockholders due to the fact that these stockholders have become the new owners of the land by virtue of the property dividend declaration. In reply please be informed that in BIR Ruling No. DA-504-05 dated December 16, 2005, the BIR ruled as follows: "The transfer of ownership of condominium units to the investors is done effectively in consideration of their respective contributions, and is without consideration. As has been ruled by this Office on numerous occasions, income, in a broad sense, means all wealth which flows into the taxpayer other than as a mere return of capital (Section 36, RR No. 2). The investors, having contributed, to the development of the aforementioned Project, did not realize any income upon the allocation of the saleable lots. Hence, the said transfer is not subject to income tax, and consequently, to withholding tax (BIR Ruling No. DA-240-01 dated November 16, 2001). Further, as a return of capital, the transfer of ownership is not a sale, barter or exchange, of real property done in the ordinary course of business. As such, said transfer does not fall within the purview of Sections 106 to 108 of the 1997 Tax Code, as amended, which would otherwise subject said transfer to the VAT. The transfer being in the nature of a return of capital, the same cannot be subject to the VAT." On the basis of the foregoing, it is hereby confirmed that the receipt by The Stockholders, of its distributive share, as return of capital, in the GPP Project, is not subject to income tax and withholding tax as well as the value added tax. CAcDTI Section 185 of RR No. 26, otherwise known as the Revised Documentary Stamp Tax Regulations, as amended, provides that conveyances of realty, not in connection with a sale, to trustees or other persons without consideration are not taxable. Accordingly, it is hereby confirmed that the receipt by The Stockholders of the condominium units and parking spaces, in relation to the GPP project is not subject to the documentary stamp tax for want of consideration. However, the notarial acknowledgments to the transfers shall be subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it is disclosed that the facts are different from that represented, then this ruling shall be null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service