BIR Ruling [DA-295-03]

September 4, 2003 BIR RULING [DA-295-03] 27 (D) (4) DA 061-01 Padilla Law Office 7/F Padilla-De Los Reyes Building 232 Juan Luna Street Binondo, Manila Attention: Atty. Sabino Padilla, Jr . Gentlemen : This refers to your letter dated August 3, 2003 stating that your client, Santiago Land Development Corporation (SLDC) is a real estate corporation engaged in real property development and the leasing of real properties; that it is wholly owned by the Bank of the Philippine Islands (BPI), a commercial banking corporation organized under Philippine laws; that as of December 31, 2002, SLDC had a capital stock of P126,936,610.00 consisting of 12,693,661 shares with a par value of P10.00 per share; that its authorized capital stock is P140,000,000.00 and its retained earnings amounted to P206,294,518.00; that while its retained earnings came to P206 Million as of December 31, 2002, its cash was only P2.8 Million and its short-term investment securities stood at P27.5 Million; that while SLDC wants to declare substantial dividends out of its retained earnings, it cannot do so through a cash dividend; that however, it has real estate inventories of P73.8 Million and land held for development of P20.0 Million; that SLDC intends to declare a property dividend and for this purpose it will transfer to its stockholder, BPI, by way of property dividend, various real estate properties at their book value and debit the book value of these properties from SLDC's retained earnings; that BPI, in turn, upon receipt of this property dividend, will take up these properties at the same book value they had while owned by SLDC. In connection therewith, you now request confirmation of your opinion that "(1) The transfer by SLDC of some of its real estate properties at their book value to BPI as a property dividend will not be subject to income tax, since it is an intercorporate dividend, and therefore not subject to tax under Section 27(D)(4) of the Tax Code of 1997; "(2) The transfer of these real properties, by way of property dividend to BPI, will be subject to value-added tax pursuant to Section 106(B)(1) or Section 106(B)(2)(a) of the Tax Code, but SLDC as transferor may pass this value-added tax to BPI; and "(3) The Deed of Conveyance of these real properties, by way of property dividend, will not be subject to documentary stamp tax under Section 196 of the Tax Code, since a property dividend is not a sale and the stockholder receiving the property dividend is not a purchaser. Neither does SLDC receive any consideration for such transfer." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Section 27(D)(4) of the Tax Code of 1997 provides that dividends received by a domestic corporation from another domestic corporation shall not be subject to tax. Accordingly, the transfer by SLDC of some of its real estate properties, at their book value, in the form of property dividend, shall not be subject to final withholding tax. Moreover, the receiving stockholder, BPI, shall not be subject to income tax or creditable withholding tax arising from receipt of the aforesaid real properties as property dividend pursuant to Section 27(D)(4) of the said Code. ICDSca 2. While the declaration of the subject real properties as property dividend is exempt from income tax, the transfer thereof to its stockholder, BPI, shall be subject to 10% value-added tax inasmuch as the real estate properties distributed as property dividend is primarily held for sale to customers or held for lease in the ordinary course of trade or business of SLDC, pursuant to Sections 106(B)(l) or 106(B)(2)(a) of the Tax Code of 1997. ( BIR Ruling No. DA 075-97 dated February 24, 1997 ) 3. Considering that the declaration by SLDC of a property dividend consisting of real estate properties to BPI is not in connection with a sale and the same is without any monetary consideration, it is not subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997. ( BIR Ruling No. DA061-01 dated April 10, 2001 ) Finally, this Office hereby authorizes the Revenue District Office (RDO) where the property is located to issue the corresponding Certificate Authorizing Registration (CAR) so that title to the aforesaid properties may now be issued in the name of the recipient stockholder, BPI, without the payment of income tax and documentary stamp tax. However, the documentary stamp tax on the notarial acknowledgment in the document shall be paid at P15.00 under Section 188 of the Tax Code of 1997. ( BIR Ruling No. DA-021-03 dated January 27, 2003 ) 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group