Hector Moreno Realty Corporation

July 17, 2007 BIR RULING [DA-384-07] Secs. 24 (D); 27 (D) (5); DA581-04 Hector Moreno Realty Corporation 37 Big Horseshoe Drive Horseshoe Village Quezon City Attention: Mr. Romeo Yap Corporate Secretary Gentlemen : This refers to your letter dated June 18, 2007 stating that Hector Moreno Realty Corporation (Hector) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) on October 28, 1991; that it is the absolute and registered owner of a parcel of land together with the improvements thereon covered by TCT Nos. 99992 and 51555 issued by the Registry of Deeds for Quezon City; that it is primarily engaged in the business of management, technical and financial consultancy and in pursuance thereof to examine, investigate, analyze and study processes, procedures, systems, conditions, prospects, value, character and circumstances of any business concern or undertaking and to provide management, marketing, investment, financial and other such or similar technical advice, assistance, services, recommendations and suggestions for corporations, associations, partnerships, firms, trustees, syndicates, individuals, combinations, joint ventures, organizations and other entities, whether domestic or foreign and to act as agent, managers, representatives, attorney-in-fact, broker contractor or any other station of trust or confidence in respect to the establishment and promotion of corporations associations, or other business firms as well as of their business activities, undertakings and concerns; that it has ceased operations and none of its stockholders wanted to purse anymore the business for which it was formed; that all its employees have long been lawfully terminated from service; that it is absolutely free of any liability to any person or to the National Government and instrumentalities; that in a Special Stockholders Meeting held on June 15, 2007, it was officially resolved that it will formally terminate its corporate life as of June 30, 2007; and that Hector by virtue of its Board Resolution, will now distribute the properties to its stockholders as liquidating dividends as one of the final stages in the winding up of its affairs. Based on the foregoing representations, you now request for confirmation on the tax consequences relative to the transfer of the said properties by Hector to its stockholders in the form of liquidating dividends. In reply thereto, please be informed that the above transfer of properties in favor of its sole stockholder 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) of the Tax Code of 1997, and consequently, to the withholding tax imposed under Revenue Regulations No. 2-98, as amended. The transfer by the liquidating corporation of its assets to its stockholder is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in a partial or complete liquidation, and consequently, the liquidating corporation is not liable for income tax for said transaction. (BIR Ruling No. DA 521-04 dated October 6, 2004) On the other hand, 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 DST imposed under Section 196 of the Tax Code of 1997, as amended. cDTACE The distribution of the assets of the corporation to its stockholder in liquidation of the business without consideration is viewed as a return of capital to the shareholder. 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 shareholder as liquidating dividends is not deemed to be selling such assets to the latter. Accordingly, the transfer by Hector of the above-described properties to the stockholders, in proportion to their respective shareholdings, shall not be subject to DST imposed under said Section 196 of the Tax Code of 1997, as amended. The notarial certification on the deeds of transfer/assignment is, however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Code. Furthermore, the stockholders who sell the real properties received by them as liquidating dividends immediately after titles thereto are transferred to their names are subject to the final capital gains tax imposed under Section 24 (D) (1) of the Tax Code of 1997, as amended, in the case of individual distributees and Section 27 (D) (5) thereof, in the case of corporate distributees. Further still, the sale of same real properties received by said stockholder/s as liquidating dividends shall be subject to DST pursuant to Section 196 of the Tax Code of 1997, as amended. Finally, since Hector, from the time it was organized was never engaged in the sale of real properties, the transfer of the above-described properties in the form of liquidating dividends to its sole stockholders is not subject to value-added tax prescribed in Section 106 (B) (4) of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337, as implemented by Revenue Regulations No. 16-2005. (BIR Ruling No. DA353-03 dated October 10, 2003) aEDCAH 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service