Delcor Investment Corporation

September 3, 2007 BIR RULING [DA - 476-07] 27 (D) (5); 39 (A) (1); DA-027-02 Delcor Investment Corporation No. 637 Bonifacio Drive, Port Area Manila Attention: Henry D. Castro Legal Counsel Gentlemen : This refers to your letter dated August 10, 2007 requesting for a ruling on the tax consequences of the sale of your property covered by Transfer Certificate of Title (TCT) No. S-79757 in Alabang, Muntinlupa City. It is represented that DELCOR INVESTMENT CORPORATION (DELCOR), is a domestic corporation duly registered with the Securities and Exchange Commission under SEC Registration No. 50752; that the primary purpose of DELCOR, as enunciated in its Articles of Incorporation is as follows: "To create, generate, develop, improve, promote and enhance any and all kinds of investment opportunities or fields of investment, whether now in being or not and whether new or old, and to provide management services, advices and counsel to or for corporations, partnerships, associations, enterprises, establishments, institutions, agencies and other instrumentalities, whether private or government and whether domestic or foreign; and for the purpose, the corporation shall invest in, purchase, acquire, hold, use, sell, lease, assign, transfer, alienate, dispose, or encumber real and personal property of every kind and description, including shares of stocks, bonds, debentures, notes, evidences of indebtedness, and other securities or interest in property; shall exercise all rights, powers and privileges connected with or incident to the ownership, possession, interest in, and use of such real and personal properties; shall act as managers, managing agents or management consultants of corporations, partnerships, agencies, associations, enterprises, establishments, institutions, private or government, domestic or foreign, excluding the management funds, securities, portfolios or similar assets of said managed firms or corporations; and may undertake, organize, form, promote, develop, or establish businesses, and all forms of enterprises, whether here or abroad, as necessary, suitable or convenient to be undertaken, organized, formed, promoted, developed or established to carry out, directly or indirectly, the purposes and interests or to enhance the businesses or to render more valuable or profitable any of the rights, properties, interest or enterprises of the corporation." ADaECI that the said primary purpose of DELCOR remains unchanged since its incorporation up to the present; that DELCOR is the registered owner of a parcel of land in Alabang, Muntinlupa City covered by TCT No. S-79757 issued by the Registry of Deeds for Muntinlupa City containing an area of 742 square meters; that the said property has never been used by DELCOR in its trade or business, nor subjected to depreciation, nor held primarily for sale or lease to customers in the ordinary course of business, and never been offered for rent or actually leased to anybody for almost 29 years now since its acquisition on August 4, 1978; that DELCOR now intends to sell the said realty to the general market due to lack of interest of the corporation in maintaining the said property; and that based on the foregoing, you are requesting for a ruling whether or not the sale of the Alabang, Muntinlupa property of DELCOR should be classified as a capital asset and will be subjected to a 6% capital gains tax and 1.5% documentary stamp tax in lieu of the 6% creditable withholding tax and 10% value-added tax considering that DELCOR is a corporation not primarily engaged in the real estate business and that the property has been held by DELCOR as an investment and no revenue has been derived therefrom since its acquisition. In reply, please be informed that Section 27 (D) (5) of the 1997 Tax Code provides that a final tax of six percent (6%) is imposed on the gains presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or current fair market value as determined in accordance with Section 6 (E) of the said Code, whichever is higher, of such lands and/or buildings. The character of the real property involved in the transaction must primarily be determined, i.e. whether or not it is capital or ordinary asset, prior to the application of the appropriate tax rates. Under Section 39 (A) (1) of the 1997 Tax Code, the term " capital asset " is negatively defined as property held by the taxpayer (whether or not connected with his trade or business), but does not include (i) 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 (ii) property held by the taxpayer primarily for sale or lease to customers in the ordinary course of trade or business; or (iii) property used in 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. (BIR Ruling No. 27-02 dated July 3, 2002) Thus, if the real property is a land or building which is not actually used in business of the seller and is treated as a capital asset, as that term is defined in Section 39 (A) of the 1997 Tax Code, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the Tax Code of 1997, whichever is higher, of such land and/or building. This rule applies, whether or not the seller is engaged in real estate business. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, shall apply. EDACSa From the foregoing and based on your representations that the subject real property has long been idle; that it had not been used in business since inception and was never leased out nor held it out for sale in the ordinary course of trade or business; and that DELCOR did not include as part of its inventories the said property nor did it derive any rental income at all, this Office hereby rules that the above subject property is properly treated as a capital asset. As such, the sale of the said property shall be subject to the capital gains tax and documentary stamp tax under Sections 27 (D) (5) and 196 of the Tax Code of 1997. Finally, considering that DELCOR is a corporation not primarily engaged in the real estate business and that the above subject property is not even used in its trade or business, thus, properly classified as its capital asset, its sale, therefore, is not subject to the 12% value-added tax (VAT) imposed under Section 106 of the Tax Code of 1997, as amended. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, however, 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