Enrique Ciacho and Sons Realty Development, Inc.

March 28, 2008 BIR RULING [DA-211-08] 73 (A); 039-02; DA-608-2004 Enrique Ciacho and Sons Realty Development, Inc. V. Mapa cor Sen. Enage Sts. Tacloban City Attention: Mr. Jerry Ciacho President Gentlemen : This refers to your letter dated September 24, 2007 requesting for a confirmatory ruling of your company's distribution of all its corporate assets as liquidating dividends to its stockholders, particularly on its exemption from creditable withholding tax and documentary stamp taxes. CaAIES It appears that Enrique Ciacho and Sons Realty Development, Inc. (ECASRDI) was dissolved on December 31, 2005 in accordance with the laws of the Philippines. On January 2007, BIR-Revenue Region No. 14 had issued a Tax Clearance Certificate on the closure of said business. The dissolution was likewise duly authorized and approved by the Securities and Exchange Commission (SEC). All debts, obligations and liabilities of the corporation have been paid and discharged. The properties and assets of ECASRDI remaining after payment of all its debts and liabilities are listed as follows: TCIDSa 1. TCT No. T-36481, Lot No. 1357; 2. TCT No. T-36484, Lot No. 1356-A-1; 3. TCT No. T-36488, Lot No. 1351-A; 4. TCT No. T-36486, Lot No. 1352-C-2; 5. TCT No. T-36498, Lot No. 1757; 6. TCT No. T-36483, Lot No. 756; 7. TCT No. T-36482, Lot No. 757; 8. TCT No. T-5408, Lot No. 739-D, E, F; 9. TCT No. T-36489, Lot No. 1234-D-1; 10. TCT No. T-36487, Lot No. 1235; 11. TCT No. T-36485, Lot No. 1234-E-1; 12. TCT No. T-36497, Lot No. 819-C; and 13. and all the improvements therein. In reply, please be informed that the above transfer of properties as liquidating dividends in favor of the stockholders of ECASRDI 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 by Republic Act (RA) No. 9337, and consequently to the creditable withholding tax imposed under Revenue Regulations No. 2-98, as amended. The transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial liquidation. (BIR Ruling No. 039-02 dated November 11, 2002) Consequently, ECASRDI is not liable for income tax on either the transfer of its assets to its stockholders, or on its receipt of the shares surrendered by them. Anent the above, Section 73 (A) of the Tax Code of 1997, provides in part, that "where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or deductible loss, as the case may be." caIACE In BIR Ruling No. 039-02 dated November 11, 2002, the Commissioner had ruled that the liquidating gain, i.e. the difference between the fair market value of the properties received vis--vis the cost basis of the shares to the stockholders, derived by an individual stockholder who is a citizen or a resident alien is subject to ordinary income tax rates prescribed under Section 24 (A) (1) of the Tax Code of 1997, as amended, or under Section 25 (A) (1) and B thereof, in case of a non-resident alien individual. Applying the foregoing, the gain, if any, derived by the stockholder/s of ECASRDI shall be subject to the regular income tax imposed under Section 27 of the 1997 Tax Code, as amended. On the other hand, 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 documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended. DTCSHA 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 stockholders. 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 dividend is not deemed to be selling such assets to the latter. Accordingly, the transfer by ECASRDI of its properties to its shareholders shall not be subject to documentary stamp tax imposed under said Section 196 of the same Tax Code, as amended. Likewise, no documentary stamp tax under Section 175 of the 1997 Tax Code, as amended by RA 9243, shall be due on the surrender by the shareholders of any shares of stock to ECASRDI. The surrender of the shares does not constitute a sale, assignment or transfer because ECASRDI is not taking title of the surrendered shares, and the shares will be retired and not retained as treasury shares. In effect, ECASRDI will not realize any benefit, as owner or otherwise from its receipt of the said shares. However, the notarial certification on the deed of conveyance is, however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Tax Code. cDCEIA Finally, if the shareholders of ECASRDI will eventually sell the aforestated real properties received as liquidating dividends immediately after title thereto is transferred to their names, the same will be subject to the final capital gains tax imposed under Section 24 (D) (1) of the Tax Code of 1997, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. cECTaD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner (Legal Service)