BIR Ruling [DA-290-06]

May 2, 2006 BIR RULING [DA-290-06] 27 (D) (5); 014-03 Attys. Jose C. Leynes & Ma. Lourdes L. Guillergan 703-A Vicente Madrigal Building 6793 Ayala Avenue Makati City Gentlemen : This refers to your letter dated April 21, 2006 stating that your client, RRP Estate Development Corporation (RRP Estate) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with principal office address at the 2nd Floor, B&M Building, 116 Aguirre Street, Legaspi Village, Makati City; that RRP Estate is a holding company primarily organized to purchase, own or hold for investment or otherwise shares of stock, bonds and other securities of any corporation or entity without engaging in stock brokerage; that the RRP Estate is neither a real estate dealer nor a real estate developer and it has never engaged in the real estate business; that RRP Estate has not been in operation for the last several years as attested to by its Corporate Secretary in her affidavit executed on April 26, 2005; that RRP Estate owned a parcel of land located at Cypress Street, Dasmarias Village, Makati City containing an area of 1,000 square meters and covered by TCT No. 125214 issued by the Registry of Deeds for Makati and Tax Declaration No. E-004-01445; that the aforesaid property has no house or improvement existing thereon as shown from the Assessment Department Certification issued by the City Assessor of Makati on April 3, 2006; that the Property has not been used in business and has been idle for several years; that on March 13, 2006, RRP Estate sold the Property to Acacia Business Corporation for the amount of P42,000,000.00; that RRP Estate paid the 6% capital gains tax due on the sale in the amount of P2,520,000.00 on March 15, 2006 as evidenced by BIR Form No. 1706 and BTR-BIR Deposit/Payment Slip; that the documentary stamp tax in the amount of P630,000.00 was also paid as shown in the BIR Form 2000 and BTR-BIR Deposit/Payment Slip; and that despite the payment of the aforesaid taxes, the Certification Authorizing Registration (CAR) of the Property in favor of the buyer has not been issued as yet by the Revenue District Office No. 50 in Makati City considering that they would like to be certain that the Property is classified as a capital asset and not an ordinary asset. Based on the foregoing representations, you now request for an opinion that the Property sold by RRP Estate which has been idle and not used in business should be classified as a capital asset and therefore subject to the 6% capital gains tax and the corresponding documentary stamp tax but is not subject to the 12% value-added tax (VAT). In reply thereto, please be informed that Section 27(D)(5) of the Tax Code of 1997, as implemented by Revenue Regulations No. 7-2003, provides "(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings . A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings." It is undisputed that the yardstick for determining whether the property is capital asset or ordinary asset is the actual use of the said property. Thus, if the property is not actually used in trade or business of the taxpayer, whether or not connected with his trade or business, or not held for lease or sale to customers, it will be classified as a capital asset. Moreover, if the property is merely held for investment purposes and remains vacant and idle, it is deemed a capital asset. This is fortified in BIR Ruling No. 014-2003 dated October 28, 2003 , where this Office ruled that "It is apparent under the foregoing provision that for a property to be considered an ordinary asset it must be actually used in the business of the corporation. Accordingly, on the condition that Wendell Holdings Co., Inc. is not habitually engaged in the real estate business as represented, the property under consideration is a capital asset. The property was neither held primarily for sale to customers nor actually used in the business of Wendell Holdings Co., Inc. . . . The property is not actually used in the business of Wendell Holdings Co., Inc. as it has remained idle and undeveloped. Therefore, the sale of the property under consideration is a sale of a capital asset, not an ordinary asset. As such, the transaction is subject to capital gains tax of 6% under Section 27(D)(5) and not to the creditable withholding tax." aESICD The phrase "taxpayers engaged in the real estate business" refers collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayer not engaged in the real estate business" shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of these Regulations. (Sec. 2(g), Revenue Regulations No. 7-2003) Inasmuch as RRP Estate is not primarily engaged in real estate business, but is merely a holding company organized to acquire, purchase, own or hold for investment or otherwise shares of stock, bonds and other securities of any corporation or entity, it is deemed not engaged in the real estate business. Consequently, the sale of the aforesaid property to Acacia Business Corporation is deemed a sale of capital asset subject to the 6% final capital gains tax but not subject to the 12% VAT. Moreover, real property, which is idle and vacant and had not been used in the ordinary course of trade or business nor had it ever been classified as property of a kind which would properly be included in the inventory if on hand at the close of the taxable year, nor had it ever been held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, the income derived from the sale thereof is not subject to the expanded withholding tax under Section 2.57.2(J) of Revenue Regulations No. 2-98, but only to the 6% capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the same Code, based on the gross selling price or fair market value (FMV) as determined in accordance with Section 6(E) of the Code, whichever is higher. Lots or improvements, classified as "investment properties", which are idle, unproductive and unimproved since the time of acquisition, and do not fall under any of the assets enumerated under Section 39(A)(1) of the Tax Code of 1997 and 2(b) of Revenue Regulations No. 7-2003 are classified as capital assets, the sale of which is subject to 6% capital gains tax, DST of 1.5% but exempt from 10% VAT. ( BIR Ruling No. DA152-04 dated March 31, 2004 ) Accordingly, we hereby confirm your opinion that the sale of RRP Estate of a parcel of land to Acacia Business Corporation which has remained idle and considered as capital asset, is: (1) subject to the capital gains tax of 6% pursuant to Section 27(D)(5) of the Tax Code of 1997; (2) subject to DST at the rate of P15.00 for each P1,000.00 or fractional part thereof in excess of P1,000.00, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196 of the Tax Code of 1997; and (3) exempt from 10% VAT, the property not being primarily held and offered for sale or lease to customers in the ordinary course of RRP Estate's trade or business, as provided under Section 109(w) of the Tax Code of 1997. ( BIR Ruling No. DA270-04 dated May 17, 2004 ) 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. HSIADc Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service