BIR Ruling [DA-228-96]

July 2, 1996 BIR RULING [DA-228-96] North Mindanao Woodland Company, Inc. 117 Dasmarias M A N I L A Attention: Mr . Alfredo S . Velasquez Secretary Gentlemen : This refers to your letter dated June 26, 1996 stating that the North Mindanao Woodland Company, Inc. (Company) is a domestic corporation with an authorized capital stock of Three Million Five Hundred Thousand Pesos (P3,500,000.00) divided into 35,000 common shares of stock, all with a par value of P100.00 per share, of which (35,000) common shares are issued and outstanding as of December 31, 1995; that as of December 31, 1995 it has a stockholders equity of Four Million Eight Hundred Twenty Four Thousand and Forty Eight Pesos (P4,824,048.00) which includes an unrestricted retained earnings of One Million Three Hundred Twenty Four Thousand and Forty Eight Pesos (P1,324,048.00); that the Company proposes to declare portion of its retained earnings as of December 31, 1995 as property dividend in favor of all stockholders of record as of the date of the board meeting during which dividends are declared; that said dividends shall be distributed in the form of real properties with a total book value of P271,042.25 as follows: Property TCT NO. Location Area Land 1877 Sta. Ana, Agusan del Norte 68,770 sq.m. Land 1876 " 3,942 Land 1875 " 19,298 Land 1874 " 9,856 Land 1863 " 5,164 Land 1873 " 24,368 Land 1870 " 36,555 Land 1867 " 26,355 Land 1871 " 131,273 Land 1872 " 76,394 Land 1869 " 8,971 Land 1868 " 45,139 Land 2300 " 36,186 Land 3020 " 33,226 Land 1866 " 7,760 Land 1927 " 32,734 Land 1722 " 22,564 Land 3328 " 32,985 Land 3319 " 6,751 Land 2346 " 2,089 that the abovementioned properties declared as dividends has been recorded in the books of the corporation at their book value; and that the total book value of the property dividends is equivalent to 8% of the corporation's issued and outstanding shares of stock as of December 31, 1995. In connection therewith, you are requesting confirmation of your opinion as follows: "1. The property dividend shall be recorded at book value in the books of both the issuing corporation and the recipient stockholders; "2. That the proposed property dividend which shall be received by the stockholders of North Mindanao Woodland Company, Inc. shall be subjected to a final withholding tax of zero percent (0%), and the receiving stockholders shall not be subjected to any income or capital gains tax arising from their receipt of these real estate properties as property dividends; "3. That said property dividend shall be subjected to 10% VAT based on market or zonal valuation; "4. That upon subsequent sale or other disposition of real estate properties received as property dividend of North Mindanao Woodland Company, Inc., the gain which is the difference between the book value at the time of the receipt of property dividend and the fair market value/zonal value at the time of its disposition shall be subjected to 35% corporate income tax; Also, the subsequent sale or other disposition of real estate properties received as property dividend by the above corporation, stockholders shall be subjected to expanded withholding tax under Revenue Regulations No. 12-94, as amended; Also, the subsequent sale or other disposition of real estate properties received as property dividend of the individual stockholders of North Mindanao Woodland Company, Inc., shall be subjected to 5% capital gains tax based on the gross selling price or fair market value prevailing at the time of sale whichever is higher under Section 21(e) of the Tax Code, as amended; and "5. That the Deed of Conveyance to be executed between North Mindanao Woodland Company, Inc. and the recipient stockholders covering real estate properties declared as property dividend, not being a sale and without monetary consideration shall not be subjected to documentary stamp tax imposed under Section 196 of the Tax Code, but only to the documentary stamp tax of P10.00 pursuant to Section 188 of the same Code, as amended." In reply, please be informed as follows: (1) That the property dividend shall be recorded at book value in the books of both the issuing corporation and the recipient stockholders; (2) That the proposed property dividend which shall be received by the stockholders of the Company shall be subject to a final withholding tax of zero (0%) percent, and the receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of these real estate properties as property dividend; (3) That the property dividends which are distributed by the Company to its stockholders and declared out of retained earnings shall be subject to VAT based on the market value or zonal valuation, whichever is higher, at the time of receipt; (4) That upon subsequent sale or other disposition of the real estate properties received as property dividends by the Company's stockholder-corporation, the gain which is the difference between the book value at the time of the receipt of the property dividend and the fair market value/zonal value at the time of its disposition shall be subject to the 35% corporate income tax. Moreover, the subsequent sale or other disposition of the real estate properties received as property dividends by the Company's stockholder-corporation shall be subject to the 7.5% creditable expanded withholding tax based on the gross selling price or total amount of consideration or its equivalent paid to the seller/owner under Revenue Regulations No. 12-94 as amended; Furthermore, the subsequent sale or other disposition of the real properties received as property dividends by individual stockholders shall be subject to the 5% capital gains tax based on the gross selling price or fair market value prevailing at the time of sale whichever is higher under Section 21(e) of the Tax Code, as amended; (5) That the Deed of Conveyance to be executed between the Company and the recipient stockholders covering the real estate properties declared as property dividends, not being a sale and without monetary consideration shall not be subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended but only to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code, as amended. (BIR Ruling No. 156-94 dated November 16, 1994) (6) That the book value of the property dividend (real property) must be annotated at the back of the Transfer Certificate of Title of the real property which shall serve as the basis of the computation of the tax upon its subsequent disposition. aisadc Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)