BIR Ruling [DA-172-96]

May 15, 1996 BIR RULING [DA-172-96] International Foundry & Machine Shop, Inc. 187-195 Rizal Avenue Ext. Grace Park, Caloocan City Attention: Mr. Mariano Nocom President & Chairman of the Board Gentlemen : This refers to your letter dated February 12, 1996 requesting for a ruling on the tax consequence of the declaration and subsequent distribution of property dividends by the International Foundry & Machine Shop, Inc. in favor of its stockholders on record as of October 31, 1995. It is represented that the International Foundry & Machine Shop, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that it has been in existence since November 17, 1960; that its present Board of Directors together with the voting stockholders decided to declare property dividends during the joint stockholders and Board of Directors meeting held on December 12, 1995; that the said property dividends, the properties of which are covered by TCT Nos. 28333, 28334 and (95057) 19686, will be distributed proportionately to its stockholders based on capital investment; that the distribution will be effected after the approval by the SEC of the property dividend declaration by way of the Deeds of Assignment covering the transfer of the said parcels of land to the stockholders; and that you are of the opinion that since the law does not recognize any gain or loss whenever property is transferred by a corporation to its stockholders by way of dividend but instead defers the tax consequences upon the subsequent sale or disposition of the property, no withholding tax is necessary at the date of the transfer of the property or property dividend and the Deed of Conveyance is not subject to documentary stamp tax because conveyance without consideration is not taxable. SECHIA In reply, please be informed that under Section 21 (c) (2) of the Tax Code, as amended, dividends received from a domestic corporation and the share of an individual partner in a partnership subject to tax under Section 24 (a) shall be taxed at the rate of 15% in 1986, 10% effective January 1, 1987; 5% effective January 1, 1988; and 0% effective January 1, 1989. Such being the case, since International Foundry and Machine Shop, Inc. declared on December 12, 1995 property dividend to all its stockholders of record as of October 31, 1995, the said property dividend is no longer subject to income tax and consequently to the creditable expanded withholding tax imposed under Revenue Regulations No. 1-90, as amended, implementing Section 50 (b) of the Tax Code, as amended. Moreover, under Section 185 of Regulations No. 26, as amended, otherwise known as the Documentary Stamp Tax Regulations, conveyances of realty, not in connection with a sale, to trustees or other persons without consideration are not taxable. Considering that the proposed transfer of the said property dividend to the stockholders is not in connection with a sale and the same is without any monetary consideration, the Deed of Conveyance to be executed to effect the transfer of such property dividend to the stockholders of the corporation is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended. However, the acknowledgment of said Deed of Conveyance is subject to the documentary stamp tax of Ten Pesos (P10.00) or Fifteen Pesos (P15.00) effective year 1996 pursuant to Section 188 of the Tax Code, as amended. (BIR Ruling No. 498-93 dated December 20, 1993) CHATEa However, the subsequent sale or other disposition of the real properties received as property dividends by the individual stockholders shall be subject to the 5% capital gains tax imposed under Section 21 (e) of the Tax Code, as amended, and the documentary stamp tax based on the gross selling price, fair market value or zonal value prevailing at the time of sale, whichever is higher. (RMO No. 41-91) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, the facts turned out to be different from that as represented, then this ruling shall be considered null and void. Very truly yours, (SGD.) ALICIA P. CLEMENO Assistant Commissioner (Legal Service)