BIR Ruling [DA-501-05]

December 14, 2005 BIR RULING [DA-501-05] Sec. 24 (D); 27 (D) (5) DA 581-04 Mr. Prudencio G. Tan 699 Jose Abad Santos Street Little Baguio, San Juan Metro Manila S i r : This refers to your letter dated November 14, 2005 requesting for a ruling on the tax implications of the transfer of a parcel of land together with the improvements thereon by Tandem Ventures and Resources, Inc. to its stockholders in the form of liquidating dividends. It is represented that Tandem Ventures and Resources, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) on September 6, 1995 with an authorized capital stock of Twenty Million Pesos (P20,000,000.00) divided into 200,000 shares with a par value of P 100.00 per share; that in a Special Meeting duly held on June 24, 2005, the Board of Directors of Tandem Ventures and Resources, Inc. unanimously approved to dissolve the said corporation by shortening its corporate life until December 31, 2005, with no single transaction whatsoever, as evidenced by its filing of income tax return for non-operation; that as a result of the aforesaid dissolution, the only asset of the said corporation is the parcel of land together with the improvements thereon located in San Juan, Metro Manila, covered by TCT No. 7183-R issued by the Registry of Deeds for San Juan, Metro Manila which will be distributed to its stockholders by way of liquidating dividends; and that Tandem Ventures and Resources, Inc. has no liability of any kind. In reply thereto, please be informed that the above transfer of properties in favor of its stockholders 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 stockholders 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 stockholders in liquidation of the business without consideration is viewed as a return of capital to the shareholders. 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 shareholders as liquidating dividends is not deemed to be selling such assets to the latter. Accordingly, the transfer by Tandem Ventures and Resources, Inc. of the above-described properties to the stockholders, 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. ADEHTS Furthermore, the stockholders who sell the aforesaid properties received by them as liquidating dividends immediately after title thereto is transferred to their names are 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 Tandem Ventures and Resources, Inc. is not engaged in real estate business and 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 stockholders 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