BIR Ruling [DA-386-06]

June 23, 2006 BIR RULING [DA-386-06] SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. M. F. A. Balili Tax Division Gentlemen : This refers to your letter dated April 24, 2006 requesting on behalf of your client, BPI-AMTG, for confirmation of your opinion that the real properties held by it as trustee are classified as capital assets, and the sale thereof is subject to the 6% final capital gains tax (CGT) imposed under Section 24(D)(1) of the Tax Code and the corresponding 1.5% documentary stamp tax (DST) imposed under Section 196 of the said Code, but is exempt from the value-added tax (VAT). It is represented that Lima Land, Inc. (LLI), a corporation existing and organized under the laws of the Philippines, with principal address at 2285 Pasong Tamo Extension, Makati City, entered into separate loan agreements with various creditors (LLI Indebtedness); that one loan agreement was with Marubeni Corporation (MC), a corporation organized and existing under the laws of Japan and licensed to do business in the Philippines, with office address at Locsin Building Ayala Avenue corner Makati Avenue, Makati City, while the other loan agreements were with several local banks, which included Development Bank of the Philippines (DBP), Land Bank of the Philippines (LBP), Rizal Commercial Banking Corporation (RCBC), China Banking Corporation (CBC) [hereinafter collectively referred to as the Bank Creditors], and the BPI Group; that subsequent to extending the loan to LLI, MC assigned a portion of its credit to Danbury Holdings, Inc. (DHI), a corporation organized and existing under the laws of the Philippines; that it is further represented that when LLI defaulted in the payment of the LLI Indebtedness, a Memorandum of Agreement (MOA) was subsequently entered into whereby LLI proposed to settle the said indebtedness by way of a dacion en pago of its real properties; that in part because MC is prohibited from owning lands in the Philippines, MC, DHI and the Bank Creditors entered into a Trust Agreement with Pooling and Sharing Agreement (hereafter referred to as the "Trust Agreement"), whereby they created a Trust and appointed BPI-AMTG as Trustee to whom (1) MC, DHI and the Bank Creditors assigned by way of Deed of Assignment their respective loan receivables from LLI; and (2) LLI assigned by way of dacion en pago the Dacion Properties as payment of the LLI Indebtedness. In reply thereto, please be informed as follows: 1. The Dacion Properties held by BPI-AMTG as Trustee are capital assets, and the sale thereof is subject to the 6% final CGT based on the gross selling price or zonal value thereof, whichever is higher, imposed under Section 24(D)(1) of the Tax Code. In relation thereto, Section 39(A)(1) of the Tax Code defines capital assets as all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not among the properties considered as ordinary assets, to wit: CaSHAc "(1) Capital Assets. The term 'capital assets' means property 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 his 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 of the taxpayer." From the above-cited provisions, there can be no uncertainty that the subject Dacion Properties are indeed capital assets, since they do not qualify under the ordinary assets enumerated above, i.e., they are not stock in trade; they are not held primarily for sale to customers in the ordinary course of its trade or business; they have never been depreciated; nor are they used nor have they been used in its trade or business ( BIR Ruling No. DA-430-04 dated August 10, 2004 ). Thus, in BIR Ruling DA-035-05 dated July 5, 2005 , this Office ruled that ". . . real properties acquired under dacion en pago as payment of a borrower's loan obligation are not ordinary assets but capital assets since they were not acquired with the intention of selling or leasing them in the course of trade or business." Inasmuch as the Dacion Properties are not used in trade or business, the same shall be treated as capital assets pursuant to Section 3(b) of Revenue Regulations No. 7-2003. 2. Section 109(P) of the Tax Code, as amended by R.A. No. 9337, provides: "SEC. 109. Exempt Transactions . (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax : xxx xxx xxx (P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business; . . ." cDIaAS The sale of real properties acquired by a taxpayer from a debtor through a dacion en pago is exempt from VAT inasmuch as they are classified as capital assets in the hands of the taxpayer which acquired them in payment for the borrower's loan obligation and the same were not primarily held for sale to customers or held for lease in the ordinary course of trade or business ( BIR Ruling DA-305-05, dated July 5, 2005 ). Accordingly, the sale of the Dacion Properties which are not held primarily for sale or lease in the ordinary course of trade or business is exempt from the VAT. ( VAT Ruling No. 012-02 dated March 6, 2002 ) 3. Finally, the sale of the Dacion Properties is subject to DST pursuant to Section 196 of the Tax Code, as amended, at the rate of P15.00 for every P1,000 of the gross selling price or zonal value of the property, whichever is higher. ( BIR Ruling DA-420-05 dated October 10, 2005 ) 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