BIR Ruling [DA-182-98]

May 8, 1998 BIR RULING [DA-182-98] Sinco Community Corporation 1909 A. de las Alas St. Sta. Ana, Manila Attention: Ms . Sylvia S . Dichoso Gentlemen : This refers to your letter dated November 7, 1997 requesting in effect for a ruling on the tax consequence of the property dividend declaration of Sinco Community Corporation. LibLex It is represented that Sinco Community Corporation is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines with an authorized capital stock of One Million Pesos (P1,000,000.00), Three Hundred Seventy Eight Thousand Two Hundred Sixty Pesos (P378,260.00) of which represents the paid-in capital of the corporation consisting of Thirty Seven Thousand Eight Hundred Twenty Six (37,826) issued and outstanding shares; that the company's audited financial statements as of December 31, 1996 reflects an unrestricted retained earnings of Two Million Four Hundred Seventy Thousand Three Hundred Eighteen Pesos & 45/100 (P2,470,318.45); and that the property the company intends to declare as property dividend consist of land and improvement with a book carrying value of One Hundred Thousand Pesos (P100,000.00) and Thirty Thousand Pesos (P30,000.00), respectively. In reply, please be informed that the property dividends which shall be received by the individual stockholders of Sinco Community Corporation 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 the said real properties as property dividends pursuant to Section 21(c)(2) of the Tax Code, as amended by Executive Order No. 37. Furthermore, under Section 24(B)(2) of the Tax Code of 1997, income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to tax on dividends. The property dividends shall be recorded at their book value in the books of both the issuing corporation and the recipient stockholder. (BIR Ruling No. DA-292-97 dated August 28, 1997) On the other hand, Sinco Community Corporation 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. (BIR Ruling No. DA-263-97 dated August 6, 1997) This is so because there is no realized gain if the value used at the time of distribution is the book value. A company realized no taxable income in declaring a dividend since the distribution of dividends among the stockholders is not a sale nor were assets used to discharge an indebtedness. [(See General Utilities and Operating Co. v. Helvering 296 U. S. 200-207) (BIR Ruling No. 154-93 dated April 28, 1993)] The documentary stamp tax on the Deeds of Conveyance to be executed by and between Sinco Community Corporation 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 inasmuch as the declaration of dividends occurred on October 31, 1997 and distributed on or before November 10, 1997. The documentary stamp tax shall be due and payable on the day of execution of the Deed of Conveyance pursuant to Section 173 of the Tax Code, as amended. (BIR Ruling Nos. 80-89 and 108-93 dated March 16, 1993) 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 pursuant to Revenue Regulations No. 11-96. (BIR Ruling No. DA-292-97 dated August 28, 1997) cdti Finally, the book value of the property dividends (real property) must be annotated at the back of the Transfer Certificates of Title of the real properties which shall serve as the basis for the computation of the tax upon its subsequent disposition. (BIR Ruling Nos. 156-94 dated November 6, 1994 and DA-263-97 dated August 6, 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. cdll Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)