BIR Ruling [DA-365-04]

June 28, 2004 BIR RULING [DA-365-04] Sec. 24 (D) (1); 196; 217-81; 158-94 Atty. Benjamin S. Benito 4th Floor, Ersan Building No. 32 Quezon Avenue, Quezon City S i r : This refers to your undated letter requesting for a clarification on whether a Deed of Sale with Right to Repurchase of a real property shall be subject to the capital gains tax before registration of the said document and annotation thereof at the back of the original title on file with the Register of Deeds even if the period to redeem has not yet expired. It is your view that should the vendor a retro redeems the property within the period stipulated, then the Deed of Sale would be rendered of no further force and effect or that the said sale or transfer of ownership would be considered as not having been consummated, hence, the imposition of the capital gains tax is not warranted. However, if the contrary happens, or when the ownership of the property is already being consolidated in favor of the vendee a retro, only then that the capital gains tax should be paid. In reply thereto, please be informed that under Section 24(D)(1) of the Tax Code of 1997, as amended, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Tax Code, whichever is higher, is imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales , by individuals, including estates and trusts. As stated above, when an individual parts with his ownership over a realty for a consideration, a corresponding capital gains tax shall be imposed as it is presumed that said individual derived a gain therefrom. 1 Accordingly, since in a pacto de retro sale the owner-vendor transfers his ownership over a realty to another for a consideration, the gain presumed to be realized by the former in the said transaction shall be subject to capital gains tax which shall be paid before registration of the deed of sale with right to repurchase with the Register of Deeds; On the other hand, if and when the owner-vendor exercises his right to repurchase the property subject of a pacto de retro sale, the reconveyance of said realty by the vendee a retro to the owner-vendor shall not be subject to capital gains tax, as the same is without any consideration and is made only for the purpose of restoring the rights of the parties to its status quo . Moreover, the subsequent redemption of the property subject to a pacto de retro sale is not embraced in Section 24(D)(1) of the 1997 Tax Code, as amended. Furthermore, a pacto de retro sale is subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code, as amended, as the same is a transfer or conveyance of real property to a purchaser for a consideration. However, the reconveyance of the subject property to the owner-vendor by the vendee a retro, as a consequence of the exercise of the owner-vendor's right to repurchase is not subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code, as amended. However, the notarial acknowledgment to said deed is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the same Tax Code. 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. SCEHaD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group Footnotes 1. BIR Ruling No. 158-94.