BIR Ruling [DA-187-05]

April 21, 2005 BIR RULING [DA-187-05] Liquidating Dividend 0039-02; DA-174-03 Salalima Gonzales & Castelo 5/F Globe Telecom Plaza Pioneer Cor. Madison Streets Mandaluyong City Attention: Atty. Melchor S. Latina Gentlemen : This refers to your undated letter requesting for a confirmatory ruling that the real property covered by Transfer Certificate of Title (TCT) No. 210525 received by Globe Telecom ("Globe") as liquidating dividend from Redbridge Property Holdings, Inc. ("Redbridge") as a consequence of its dissolution is exempted from the documentary stamp tax (DST) imposed under Section 196 of the Tax Code of 1997, as amended. The facts as represented are as follows: Globe is a corporation enfranchised to provide telecommunications services under Republic Act (RA) No. 7229 and related laws and as such, is in need of lots and other real properties for its cellsites and other telecommunications facilities. To better manage the acquisition of necessary sites, Globe sought to acquire Redbridge, an entity authorized to engage in the business of real property which at the time of the acquisition owned the subject property as its only asset in addition to the cash balance. On the other hand, Ayala Land, Inc. (ALI) is a corporation who owned in its own rights and held absolute or beneficial title over the entire shares in Redbridge in an aggregate number of 456,000 shares. On March 31, 2000, ALI and Globe executed a Contract to Sell whereby ALI undertook to sell its 456,000 shares in Redbridge to Globe. On August 10, 2000, upon the fulfillment of the terms and conditions under the Contract to Sell, ALI and Globe executed a Deed of Absolute Sale covering the 456,000 shares of ALI in Redbridge. After payment of the corresponding taxes due thereon, ownership of said shares was transferred to Globe. With the prevalence of the problems encountered by Globe in connection with the acquisition of lots for its cellsites and the skyrocketing prices of real estate, Globe found that leases were more convenient for its cellsite lots requirement and it was more cost-efficient to outsource site acquisition to professional third party entities engaged in this business. Consequently, the existence of Redbridge became irrelevant as far as the original objective was concerned. By virtue of the resolution passed by the Board of Directors on September 4, 2000 unanimously approving the shortening of the term of existence of Redbridge up to December 31, 2000, the Securities and Exchange Commission (SEC) approved the dissolution of Redbridge on May 16, 2001. On August 15, 2001, after the dissolution of Redbridge was approved by SEC, the Board of Directors of Redbridge approved the transfer and conveyance of the above subject property to Globe as liquidating dividend for the purpose of winding up its affairs. The said property has an area of 1,659 square meters, more or less, and has a zonal value at P150,000.00 per square meter or an aggregate of P248,850,000.00, which remains unchanged since the time it was declared as liquidating dividend on August 15, 2001 up to the present. The value-added tax (VAT) due on the above transfer was paid. DEICTS Based on the foregoing, you are requesting for a ruling that the conveyance of the above subject property by way of liquidating dividend from the dissolved corporation Redbridge to its sole stockholder, Globe, is exempt from documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended. In reply thereto, please be informed that pursuant to Section 189 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations," a conveyance of real estate by a corporation without valuable consideration to an owner of all its capital stock in consequence of its dissolution is not subject to tax . Under this provision, a distribution in liquidation of the assets of a corporation consisting of real estate, without valuable consideration, is not subject to DST imposed under Section 196 of the Tax Code of 1997, as amended. The distribution of the assets of the corporation to its stockholders in liquidation of the business without consideration is viewed as a return of capital to the shareholders. Considering this, the provision of Section 196 of the Tax Code of 1997, as amended, shall not apply. Thus, it has been held that a corporation that distributes its assets to its shareholders as liquidating dividends is not deemed to be selling 1 such assets to the latter. Accordingly, the transfer by Redbridge of its above property to Globe, its sole stockholder, shall not be subject to DST imposed under said Section 196 of the Tax Code, as amended. The notarial certification on the deeds of assignment is, however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Tax Code. On the other hand, the transfer of the above subject property in favor of Globe as a liquidating dividend is not subject to the corporate income tax imposed under Section 27(A) or to the capital gains tax imposed under Section 27(D)(5) both of the Tax Code of 1997, as amended, and consequently, to the withholding tax imposed under Revenue Regulations No. 2-98, as amended. The transfer by the liquidating corporation of its assets to its stockholders is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in a partial or complete liquidation, and consequently, the liquidating corporation is not liable for income tax for said transaction. (BIR Ruling No. 039-02, supra, cited in BIR Ruling No. DA-174-03 dated June 3, 2003) Anent the above, Section 73(A) of the Tax Code of 1997, as amended, provides in part, that "where a corporation distributes all its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is taxable income or deductible loss, as the case may be." The liquidating gain, i.e., the difference between the fair market value of the properties received vis-a-vis the cost basis of the shares to the stockholders, derived by a stockholder is therefore subject to the ordinary income tax rates. Accordingly, the gain, if any, derived by Globe shall be subject to the regular income tax imposed under Section 27 of the Tax Code, as amended. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group Footnotes 1. BIR Ruling No. 039-02, dated November 11, 2002.