BIR Ruling [DA-459-05]

November 10, 2005 BIR RULING [DA-459-05] Llamas & Tugonon LBC Hangar, General Aviation Area Domestic Airport Compound, Pasay City Attention: Atty. Juan Victor R. Llamas Gentlemen : This refers to your letter dated July 5, 2005 requesting confirmation of your opinion that the transfer of condominium units by individual trustees to LBC Properties, Inc. are not subject to the 6% capital gains tax and to the 1.5% documentary stamp tax imposed under Sections 24(D)(1) and 196, respectively, of the Tax Code of 1997, as amended. The facts as represented are as follows: In 1999, Comunidades Developers, Inc. (CDI) introduced into the Philippines an innovative approach to commercial, office and residential condominium ownership adopted from the Spanish model known as Regimen de Comunidad Proprietario (Private Ownership Community) but modified to take into account the relevant laws, regulations and practices here in the Philippines. Under said scheme, CDI acted as project proponent/organizer for the development of Lot 4, Block 13, Phase 1, of the Filinvest Corporate City into a residential condominium project known as "Parque Espaa Project" (the Project).CDI was responsible for finding investors who collectively undertook in the development of the Project. As part of his/her interest in the Project each investor was assigned specific condominium and parking units in the Project. In addition, the investor had a proportionate undivided interest in the common areas of the Project, which common areas include the land upon which the Project stood. LBC Properties, Inc. was one of the investors in the Project. Its investments are being held in trust by certain individuals, namely: Messrs. Benito R. Araneta, Fernando V. Gonzales, Arturo Rocha, Alfredo D. Roa III and Jose Juan Pou. For this purpose an Indemnity Agreement and Declaration of Trust with Deed of Assignment were executed by said individuals in January 2000 in favor of LBC Properties, Inc. as beneficiary. Under said Agreement, the trustee acknowledges and declares that the condominium units, parking units and proportionate interest in the common areas assigned to him are all "trust estate" being held by him in trust for and for the benefit of LBC Properties, Inc.;that all income, profits, interest and dividends declared on such property are similarly being held in trust for the benefit of LBC Properties, Inc.;that trustee obligates himself to transfer and by said presents have transferred and assigned to LBC Properties, Inc. the trust estate, including any interest therein; and that upon actual transfer by trustee of the entire estate to LBC Properties, Inc. he shall be discharged of his duties as trustee of the trust estate. The transfer by trustee of the trust estate to LBC Properties, Inc. as beneficiary is without consideration. In reply, please be informed that your above opinion is hereby confirmed as follows: Under Section 24(D)(1) of the Tax Code of 1997, as amended, 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, shall be taxed at the rate of 6% based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. In the instant case, however, there is no sale, exchange or disposition of real property involved, since LBC Properties, Inc. is the real owner of the aforesaid "trust estate", comprising of condominium units, parking units and proportionate interest in the common areas, while the individuals, namely: Messrs. Benito R. Araneta, Fernando V. Gonzales, Arturo Rocha, Alfredo D. Roa III and Jose Juan Pou, acted merely as trustees. Accordingly, the transfer of titles over the said trust estate from the individual trustees to LBC Properties, Inc., without monetary consideration under and by virtue of the Indemnity Agreement and Declaration of Trust with Deed of Assignment each individual had executed separately, which effectively acknowledges the existence of a trust by and between them and LBC Properties, Inc. is not subject to the capital gains tax nor to the creditable withholding tax prescribed by Revenue Regulations No. 2-98, as amended, implementing Section 57(B) of the Tax Code of 1997, as amended. (BIR Ruling No. 108-98 dated June 29, 1998). On the other hand, under Section 191 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations" conveyances to a trust without valuable consideration, or from a trustee to a cestui que trust without valuable consideration are not subject to tax. From the foregoing and since the above conveyances of the trust estate by the individual trustees to LBC Properties, Inc. are in connection and in recognition of an express trust, the said transfers, therefore, are not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended. However, the notarial acknowledgements to the individual Indemnity Agreement and Declaration of Trust with Deed of Assignment executed by the trustees in favor of LBC Properties, Inc. are subject to the documentary stamp tax of P15.00 only pursuant to Section 188 of the same Code. (BIR Ruling No. 027-93 dated January 15, 1993 and BIR Ruling No. 080-02 dated April 29, 2002). 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