BIR Ruling [DA-248-96]

July 17, 1996 BIR RULING [DA-248-96] GF Equity, Inc. 6th Floor, Corinthian Plaza Building 121 Paseo de Roxas Makati City Attention: Atty . Constantino V . Rodel Counsel Gentlemen : This refers to your letter dated April 8, 1996 requesting for a confirmation of your opinion that the property dividend payable by GF Equity, Inc. to its stockholders is exempt from income tax, documentary stamp tax, and value-added tax. It is represented that GF Equity, Inc. is a holding and management company owning shares of various corporations and pieces of real property; that GF Equity, Inc., in turn, is owned almost equally by two holding corporations, namely: SCM Bond Holdings, Inc. and Grand Floridian Holdings, Inc.; that in its meeting on August 16, 1995, the Board of Directors of GF Equity, Inc. approved the declaration and distribution of property dividend consisting of various condominium units with a total net book value of P26,223,548.00, payable on or before December 29, 1995, to stockholders of record as of the date of the meeting or August 16, 1995; that as of December 31, 1994, GF Equity, Inc. has an unrestricted retained earnings of P66,666,908.00 per its audited financial statements; that the following properties were declared as dividend: CCT No. Area (sq. m.) Net Book Value S-1149 3,927 P5,515,678.00 3521 217 799,543.00 3486 320 1,020,455.00 5355 269 1,126,931.00 5356 264 1,206,850.00 5354 263 1,101,161.00 5353 269 1,140,892.00 21562 285 7,133,786.00 21563 285 7,178,253.00 Total P26,223,548.00 ============ that the aforesaid real properties declared as property dividends are no longer intended to be used in the primary business of the Corporation; and that in support of your request, you submitted to this Office, the following documents: 1. Deeds of Assignments conveying the said properties from GF Equity, Inc., to SCM-Bond Holdings, Inc. and Grand Floridian Holdings, Inc. with attached Condominium Certificates of Title; 2. Articles of Incorporation of GF Equity, Inc. and the two recipient corporations; 3. By-Laws of GF Equity, Inc. and the two recipient corporations; 4. Audited Financial Statements of GF Equity, Inc. as of December 31, 1994; 5. Secretary's Certificate attesting to the Resolution of the Board of Directors of GF Equity, Inc. approving the property dividend; 6. Certified list of stockholders with their corresponding holdings as of August 16, 1995; and 7. Copies of Tax Declarations of properties transferred. Based on the foregoing and documents submitted, you now request confirmation of your opinion that: "1. The real property declared as dividends can be recorded at their respective book values in the books of GF Equity, and GF Equity's stockholders can record in their books the dividends thus received at the same book values; "2. The property dividend which shall be received by the stockholders of GF Equity shall be subject to a final withholding tax of zero (0%) percent, if received by individuals, and exempt from income tax and consequently from withholding tax if received by domestic corporations; "3. GF Equity 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 property declared and distributed as property dividends; "4. Upon subsequent sale or other disposition of the property received as dividends by the stockholders, the basis of such sale or disposition shall also be its book value at the time of the dividend distribution; "5. The Deeds of Assignment executed between GF Equity and the recipient stockholders covering the subject real properties declared as property dividends not being a sale and without consideration is not subject to the documentary stamp tax; and "6. The said property dividends are not subject to value-added tax (VAT) because the dividends are due and payable on or before December 29, 1995 and the corresponding Deeds were executed on December 29, 1995, during which the implementation of the Expanded VAT Law (R. A. 7716) remains suspended." In reply, please be informed as follows: 1. That the property dividend shall be recorded at the book value in the books of both the issuing corporation and the recipient stockholders. 2. That we confirm your opinion that the proposed property dividend which shall be received by the stockholders of GF Equity, Inc. 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 properties as property dividend (Section 21(c)(2) of the Tax Code, as amended by Executive Order No. 37). 3. That we also confirm your opinion that GF Equity, Inc. 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 property declared and distributed as property dividends because there is no realized gain considering the fact that the value used at the time of distribution is the book value. 4. Your opinion that upon the subsequent sale or other disposition of the property received as dividends by the stockholders, the basis of such sale or disposition shall also be its book value at the time of the dividend distribution is hereby confirmed (BIR Ruling No. 276-91 dated December 26, 1991). 5 That the Deed of Assignment executed by GF Equity, Inc. and the recipient stockholders covering the subject real 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 Nos. 108-93 dated March 16, 1993; 498-93 dated December 20, 1993; and 156-94 dated November 16, 1994). 6. That we also confirm your opinion that the said property dividends are not subject to value-added tax (VAT) because the dividends are due and payable on or before December 29, 1995 and the corresponding Deeds were executed on December 29, 1995, during which the implementation of the Expanded VAT Law (R. A. 7716) remains suspended. Moreover, the book value of the property dividend (real property) must be annotated at the back of the Condominium Certificate of Title of the real property which shall serve as the basis of the computation of the tax upon its subsequent disposition. (BIR Ruling No. 156-94 dated November 16, 1994) Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Rev. Executive Assistant Legal Service