BIR Ruling [DA-353-06]

June 6, 2006 BIR RULING [DA-353-06] R.R. No. 7-03; S-27 (D) (5) SGV & Co . 6760 Ayala Avenue Makati City Attention: Atty. E.C. Alcantara Tax Division Gentlemen : This refers to your letter dated April 8, 2005 requesting in behalf of your client, Land Traders Holdings Incorporated (LTHI), confirmation of your opinion that LTHI's vacant and idle parcel of land, which was never used by it in trade or business since it never operated, nor subjected to depreciation, nor included in its stock in trade or inventory, nor held primarily tar sale or lease to customers in the ordinary course of business previous to Revenue Regulations (RR) No. 07-03 dated December 27, 2002 or the Revenue Regulation "Providing the Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39(A)(1) of the National Internal Revenue Code of 1997 for Purposes of Imposing the Capital Gains Tax under Sections 24(D), 25(A)(3), 25(B) and 27(D)(5), or the Ordinary Income Tax under Sections 24(A), 25(A) & (B), 27(A), 28(A)(1) and 28(B)(1), or the Minimum Corporate Income Tax (MCIT) Under Sections 27(E) and 28(A)(2) of the same Code" effective February 28, 2003, should continue to be treated as a capital asset, and its subsequent sale of the said property which is classified as a capital asset is subject to the six percent (6%) final capital gains tax based on the gross selling price or fair market value thereof, whichever is higher, pursuant to Section 27(D)(5) of the National Internal Revenue Code of 1997, as amended (1997 Tax Code, as amended). The facts as represented are as follows: LTHI is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with principal office at Number 2297. Priscilla 100 Building, Pasong Tamo Extension, Makati City. LTHI was formerly known as Land Traders Realty Incorporated (LTRI for brevity), duly incorporated on the 27th day of March, 1989 as shown in its Securities and Exchange Commission Registration No. 161581. LTRI was engaged in the purchase and lease of real property, as well as to improve, manage or otherwise dispose of buildings, houses, apartments, and other structures of whatever kind. LTRI's primary purpose of incorporation is to purchase, invest in, acquire and hold, own, use sell, assign, transfer, mortgage, pledge, exchange, or otherwise dispose of real property of every kind and description, including shares of stock, bonds, debentures, notes, evidences of indebtedness and other securities, contracts or obligations of any corporation or corporations, association or associations, domestic or foreign, and to pay therefore in whole or in part in cash or exchanging therefore stocks, bonds, or evidences of indebtedness or securities of this or any other corporation, and while the owner or holder of any such real or personal property, stocks, bonds, debentures, notes, evidences of indebtedness or other securities, contracts, or obligations, to receive, collect, assign, transfer, pledge and dispose of the interest, dividends and income arising from such property, and to possess and exercise in respect thereof, including all the rights, power and privileges of ownership, including all voting powers on any stocks so owned; without in any manner engaging in the business as stock broker or dealer in securities. On May 10, 1989, it acquired a parcel of land, duly classified as an industrial land, in the City of Las Pias. Such parcel of land was leased to a foreign corporation starting July 31, 1989. The foreign corporation erected a building on the said leased parcel of land and operated thereon a manufacturing facility until about the year of 1998. No further operations on the building were carried on since then, until the structures were demolished in January 2002. The reason for this was that the said parcel of land was primarily leased because of its ideal location for industrial purposes but with the change in the location of investment priority areas in the country the property lost its value as such a location. This said factor significantly contributed to the abandonment of the said premises on the parcel of land since 1998. The lease contract was cancelled due to the fact that there were no structures left on the said parcel of land. Hence, with the land having lost its appeal as an industrial site and with almost certain impossibility of obtaining an industrial lessor, LTRI converted the vacant land into a residential land for classification purposes. On February 15, 2002, LTRI changed its primary business purpose from real estate into a holding company. Consequently, LTRI became known as LTHI. Since May 31, 2002, LTHI has not been operating, as shown in its Annual Corporate Income Tax Returns, nor has it used the said land for profit or included the same in its inventory properly subject to depreciation as shown in its Annual Financial Statements. LTHI treats the said parcel of land as a capital asset since January 2002, or for almost three (3) years since the time of its incorporation as a holding company, up to the present. It is LTHI's intention to soon dispose of the said property. In reply, please be informed of the following: Section 39(A)(1) of the 1997 Tax Code, as amended, defines "capital assets" as properly held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business. SDHETI In other words, the real property not used by the owner in its business, not forming part of inventory, not held for speculative purposes, and not being subjected to depreciation shall be classified as capital assets (BIR Ruling No. DA-213-02 dated November 21, 2002). Pursuant to Section 27(D)(5) of the 1997 Tax Code, as amended, a final tax of six percent (6%) is imposed on the capital gains tax presumed to have been realized in 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 the Same Code, whichever is higher. aATCDI In view of the fact that LTHI has remained a holding company without any active operation from the time of its incorporation up to the present, the subject property of LTHI has remained idle and unproductive, it did not become part of LTHI's inventory, LTHI has not derived income or depreciation expense from the said real property, and the said property has been consistently considered as a capital asset by LTHI since the time of its incorporation as a holding company, the sale of said property, therefore, would be subject to the 6% capital gains tax. In addition, since LTHI has satisfied the requirements for treatment of capital assets previous to RR No. 07-03, the same shall find no application to the case at bar. Based on the foregoing, the subsequent sale of LTHI of the said parcel of land treated as a capital asset Will not be subject to the creditable withholding tax under Section 2.57.2 (J) of RR No. 2-98, as amended by RR 6-2001, dealing with sale of ordinary assets, but only to the capital gains tax of six percent (6%) under Section 27(D)(5) and to documentary stamp tax under Section 196, both of the Tax Code of 1997, as amended, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the same Code, whichever is higher. 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 Commissioner of Internal Revenue