BIR Ruling [DA-451-06]

July 21, 2006 BIR RULING [DA-451-06] Secs. 24 (D); 27 (D) (5); DA 581-04 Vita Realty Corporation Penthouse, Morning Star Center 347 Sen. Gil Puyat Avenue Makati City Attention: Mr. Vicente T. Lim President Gentlemen : This refers to your follow-up letter dated April 3, 2006 relative to your letter dated September 14, 2005 requesting for a ruling on the tax implications of the transfer of three (3) parcels of land by Riverside Development Corporation (Riverside) to its sole stockholder, Vita Realty Corporation (Vita), in the form of liquidating dividends. It is represented that Riverside is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with SEC Registration No. 002705 dated March 11, 1996; that Riverside is the registered owner of three (3) parcels of land located at Riverside Drive, Bagong Ilog, Pasig City covered by TCT Nos. 103670, 103671 and 103672 issued by the Registry of Deeds for the Province of Rizal; that from the time it was organized, Riverside did not do any business as a result of which, the SEC cancelled and or revoked its Certificate of Incorporation; that the Board then passed a resolution on September 16, 2004 duly approved by the stockholders, deciding not to appeal the said cancellation; that at the time the Certificate of Registration was cancelled, Riverside had no liabilities and its only assets were the three (3) parcels of land; and that Riverside, by virtue of the Board Resolution, will now distribute the said properties to its sole stockholder, Vita, as liquidating dividends as one of the final stages in the winding up of its affairs. In reply thereto, please be informed that the above transfer of properties in favor of the stockholder, Vita, 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. 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 Riverside of the above-described properties to the stockholder, in proportion to its 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 stockholder who sells the real properties received by it as liquidating dividends immediately after titles thereto are transferred to its name is subject to the final capital gains tax imposed under Section 24(D)(1) of the Tax Code, as amended, in the case of individual distributees and Section 27(D)(5) thereof, in the case of corporate distributees. Finally, since Riverside, from the time it was organized, did not do any business and subsequently its Certificate of Incorporation was cancelled and revoked by the SEC, the transfer of the above-described properties in the form of liquidating dividends to its sole stockholder is not subject to value-added tax prescribed in Section 106(B)(4) of the Tax Code of 1997. (BIR Ruling No. DA353-03 dated October 10, 2003) 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