BIR Ruling [DA-257-97]

July 31, 1997 BIR RULING [DA-257-97] De La Cruz & Associates 4th Floor, Dominga Building I 606 Shaw Boulevard Pasig City Attention: Mr. Eliseo L. de la Cruz Partner Gentlemen : This refers to your letter dated June 16, 1997 requesting for confirmation of your opinion that the property dividend payable by ALC INDUSTRIAL & COMMERCIAL DEVELOPMENT CORPORATION to its stockholders is exempt from income, documentary stamp and value-added taxes. It is represented that ALC INDUSTRIAL & COMMERCIAL DEVELOPMENT CORPORATION is a management company owning pieces of real property located within Metro Manila; that on its meeting on September 5, 1995, the Board of Directors of ALC INDUSTRIAL & COMMERCIAL DEVELOPMENT CORPORATION approved the declaration and distribution of property dividends of its two (2) parcels of land with a total net book value of P369,625.00 payable on or before December 29, 1995 to stockholders of record as of the date of the meeting last September 5, 1995 including cash dividend in the amount of P330,375.00 for a total of P700,000.00; that as of August 31, 1995, ALC INDUSTRIAL & COMMERCIAL DEVELOPMENT CORPORATION has an unrestricted retained earnings of P777,796.56 per its audited financial statements; that the following properties were declared as dividends: TCT No. Area (Sq. M.) Net Book Value 11032 1477 P184,625.00 11034 1480 185,000.00 P369,625.00 Cash Dividend 330,375.00 Total P700,000.00 ========== that the aforesaid real properties declared as property dividends are no longer intended to be used in the primary business of the corporation and no improvements were effected thereon; and that in support of your request, you submitted to this Office, the following documents: EIaDHS 1. Deed of Assignment conveying the said properties to its stockholders; 2. Articles of Incorporation of ALC INDUSTRIAL & COMMERCIAL DEVELOPMENT CORPORATION; 3. By-Laws of the corporation; 4. Audited Financial Statements as of August 31, 1996; 5. Secretary's Certificate attesting to the Resolution of the Board of Directors of ALC INDUSTRIAL & COMMERCIAL DEVELOPMENT CORPORATION approving the property and cash dividends; 6. Certified list of stockholders with their corresponding holdings as of September 5, 1995; and IHaCDE 7. Copies of TCTs and Tax Declarations of properties transferred. Based on the foregoing, you now request confirmation that: "1. The property dividend which shall be received by the stockholders of ALC INDUSTRIAL & COMMERCIAL DEVELOPMENT CORPORATION shall be subject to a final withholding tax of zero (0%) percent, if received by an individual; "2. ALC INDUSTRIAL & COMMERCIAL DEVELOPMENT 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 property declared and distributed as property dividends; "3. The Deed of Assignment executed between ALC INDUSTRIAL & COMMERCIAL DEVELOPMENT CORPORATION and the recipient stockholder 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 "4. 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 (RA 7716) remains suspended." In reply, please be informed as follows: 1. That the property dividends which shall be received by the individual stockholders of ALC INDUSTRIAL & COMMERCIAL DEVELOPMENT 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. [Section 21 (c) (2) of the Tax Code, as amended by Executive Order No. 37] 2. That ALC INDUSTRIAL & COMMERCIAL DEVELOPMENT CORPORATION shall not be subject to any income or capital gains tax on the difference between the fair marked value and the book value of the real estate properties declared and distributed as property dividends. 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)]. AHDaET 3. That the Deed of Assignment executed by ALC INDUSTRIAL & COMMERCIAL DEVELOPMENT CORPORATION 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). 4. 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 dividends (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. (BIR Ruling No. 156-94 dated November 16, 1994) 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, (SGD.) SIXTO S. ESQUIVIAS IV OIC-Assistant Commissioner (Legal Service)