BIR Ruling [DA-360-06]

June 9, 2006 BIR RULING [DA-360-06] 73 (A); DA-164-2004 Tondo Holdings Corporation 32/F Tower One, Ayala Avenue Makati City Attention: Attys. Renato O. Marzan and Arlene B. Montero Gentlemen : This refers to your letter dated March 30, 2006 relative to the distribution of certain real properties as liquidating dividends by Tondo Holdings Corporation (THC) to one of its stockholders pursuant to a partial liquidation. The facts as you represented, are as follows: THC is a corporation duly organized and existing under the laws of the Philippines with principal office located at 32/F Tower One Ayala Avenue, Makati City. THC's primary purpose as stated in its Articles of Incorporation is: "To invest in, purchase, or otherwise acquire and own, hold, use, sell, assign, transfer, mortgage, pledge, exchange, or otherwise dispose of real and personal property of every kind and description, including shares of stock, bonds, debentures, notes, evidences of indebtedness, and other securities or obligations of any corporation or corporations, association or associations, domestic or foreign, for whatever lawful purpose or purposes the same may have been organized and to pay therefore in money or by exchanging therefore stocks, bonds, or other evidences of indebtedness or securities of this or any other corporation, and while the owner or holder of such real or personal property, stocks, bonds, debentures, contracts, or obligations, to receive, collect and dispose of the interest, dividends, and income arising from such property; to possess and exercise in respect thereof all the rights, powers and privileges of ownership, including all voting powers of any stock so owned, and to carry on and manage the general business of any company, except to engage in business as a stock broker or dealer in securities." THC is currently owned 60% by Ayala Corporation and 40% by Procter & Gamble Philippines, Inc. (P&G). THC shall undergo a partial liquidation through a decrease of its existing authorized capital stock and issued and outstanding capital stock in an amount equivalent to 60% thereof corresponding to the entire shareholdings of Ayala Corporation in THC. As a consequence, P&G shall own 100% of THC after the decrease in capital stock. As a result of the decrease in capital stock, THC shall redeem the 60% shareholdings of Ayala Corporation in THC by declaring liquidating dividends in favor of Ayala Corporation in the form of real properties, i.e., consisting of 60% of the land asset of THC. In turn, Ayala Corporation shall surrender its entire shareholdings in THC resulting in the cancellation thereof in the Stock and Transfer Book of THC. You now request for a confirmation of the following, that: (1) THC is not liable to income tax on its receipt of the surrendered shares of Ayala Corporation in THC and the subsequent cancellation thereof by THC since the same will be done to implement the decrease in capital stock of THC pursuant to a partial liquidation. Upon receipt of the surrendered shares, THC will not take title thereto nor receive any value for the surrendered shares. (2) THC is not subject to the corporate income tax under Section 27(A) or to the capital gains tax imposed under Section 27(D)(5) both of the Tax Code of 1997, and consequently to the withholding tax imposed by Revenue Regulations No. 2-98, as amended, on the conveyance of the parcels of land to Ayala Corporation as liquidating dividends since the same is not considered a sale of real property. CAHaST A liquidating corporation does not realize gain or loss in a partial or complete liquidation, and consequently, the liquidating corporation is not liable to income tax for said transaction. (3) The Deed of Conveyance to be executed between THC and Ayala Corporation whereby the parcels of land distributed as liquidating dividends to Ayala Corporation is also not subject to the Documentary Stamp Tax (DST) under Section 196 of the Tax Code of 1997, as amended, since the conveyance thereof is not a considered a sale or disposition thereof and such conveyance is done without valuable consideration. (4) Any gain realized or loss sustained by Ayala Corporation from its receipt of the liquidating dividend in the form of real property shall be treated as capital gain or loss and shall be taxable income or deductible loss by Ayala Corporation. The liquidating gain shall be measured by the difference between the fair market value of the properties received vis--vis the cost basis of the shares to the shareholders. Any gain to be derived, if any, by Ayala Corporation shall be subject to the regular corporate income tax rate of 35% imposed under Section 27 of the Tax Code, as amended by Republic Act (RA) No. 9337. (5) The conveyance by THC of the real properties as liquidating dividends to its stockholder, Ayala Corporation, in redemption of the latter's shares of stock in THC is not subject to 10% VAT imposed under Section 106(A) of the Tax Code, as amended, since the same is not done in the course of its trade or business. In reply, please be informed that: 1. A liquidating corporation is not subject to income tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial liquidation. In the instant case, THC merely performs the ministerial function of implementing the reduction of capital stock and therefore THC is not taking title to nor will it receive any value for the surrendered shares. The reduced shares of THC do not represent value since they are merely the documentary evidence of the reduced capital stock and will cease to exist after their cancellation. From the foregoing, it can be said that a company under partial liquidation is not subject to income tax for receiving from its stockholders surrendered shares and for canceling the reduced shares. 2. The transfer of properties in favor of Ayala Corporation as liquidating dividends is not subject to the corporate income tax imposed under Section 27 (A) or to the capital gains tax imposed under Section 27(D)(5) both of the Tax Code of 1997 and consequently to the withholding tax imposed under Revenue Regulations (RR) No. 2-98, as amended. The transfer by THC consisting of 60% of its land assets to Ayala Corporation is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. ScTIAH 3. Pursuant to Section 189 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations," a conveyance of real estate by a corporation without valuable consideration to an owner of all its capital stock in consequence of its dissolution is not subject to tax. Under this provision, a distribution in liquidation of the assets of a corporation consisting of real estate, without valuable consideration, is not subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended. The distribution of the assets of the corporation to its stockholders in liquidation of the business without consideration is viewed as a return of capital to the stockholders. Considering this, the provision of Section 196 of the Tax Code of 1997, as amended, shall not apply. Thus, it has been held that a corporation that distributes its assets to its shareholders as liquidating dividend is not deemed to be selling such assets to the latter. Accordingly, the transfer by THC of its properties to Ayala Corporation shall not be subject to documentary stamp tax imposed under said Section 196 of the Tax Code, as amended. Likewise, no documentary stamp tax under Section 176 of the 1997 Tax Code, as amended, shall be due on the surrender by Ayala Corporation of its shares of stock to THC. The surrender of the shares does not constitute a sale, assignment or transfer because THC is not taking title of the surrendered shares, and the shares will be retired and not retained as treasury shares. In effect, THC will not realize any benefit, as owner or otherwise, from its receipt of the said shares. The notarial certification on the Deed of Conveyance is, however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Tax Code. 4. Section 73(A) of the Tax Code of 1997, provides in part, that "where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or deductible loss, as the case may be." In BIR Ruling No. 039-02 dated November 11, 2002, the Commissioner had ruled that the liquidating gain, i.e . the difference between the fair market value of the properties received vis--vis the cost basis of the shares to the stockholders, derived by an individual stockholder who is a citizen or a resident alien is subject to ordinary income tax rates prescribed under Section 24 (A)(1) of the Tax Code of 1997, as amended, or under Section 25 (A)(1) and B thereof, in case of a non-resident alien individual. Applying the foregoing, the gain, if any, derived by Ayala Corporation shall be subject to the regular income tax imposed under Section 27 of the 1997 Tax Code. 5. The conveyance by THC of its real properties as liquidating dividends to Ayala Corporation, in redemption of the latter's shares of stock in THC is not subject to 10% VAT imposed under Section 106(A) of the Tax Code, as amended, since the transfer of said properties was not made in the course of its trade or business. (BIR Ruling No. DA-164-2004 dated April 5, 2004) Finally, if Ayala Corporation will eventually sell the aforestated real properties received as liquidating dividends immediately after title thereto is transferred to its name, the same will be subject to the final capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997 or RR No. 6-2001, whichever is applicable. It bears emphasis, however, that prior to dissolution, the Bureau must investigate and determine that THC has no outstanding tax obligation, and if it has, the same must be settled fully before it can dissolve and distribute its remaining assets to its stockholders. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service