BIR Ruling [DA-525-04]

October 8, 2004 BIR RULING [DA-525-04] Sec. 24 (B) (2); 156-94 DA 246-03; DA 061-01 Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30/F Citibank Tower 8741 Paseo de Roxas, Makati City Attention: Atty. Wilma M. Valdemoro-Cua Atty. Jayson L. Fernandez and Atty. Connie G. Chu Gentlemen : This refers to your letter dated June 29, 2004, stating that your client, Terocel Realty, Inc. (Terocel) is a corporation duly organized and existing under the laws of the Republic of the Philippines with principal office address at 1313 M. Adriatico Street, Ermita, Manila; that Terocel is engaged in the business of buying, selling, managing and leasing real properties; that all of its stockholders are residents of the Philippines; that based on the audited financial statements of Terocel as of April 30, 1997 and April 30, 1998, Terocel had unrestricted retained earnings of P8,871,026 and P13,016,784, respectively; that on February 25, 2004, the Board of Directors of Terocel declared a portion of its retained earnings as of December 31, 1997 as property dividends in favor of all stockholders of the Company as of February 29, 2004 consisting of fifty lots covering 9,432.62 square meters, more or less, located in Sampaloc, Manila with a total book value of P174,785.15 (the "Sampaloc Properties"); that in order to facilitate the distribution of dividends, the stockholders of Terocel as of February 29, 2004 have been grouped into three shareholder groups referred to as: PECHATEN, ALEGAR and BENLEG; that the property dividends will be distributed among the stockholders of Terocel as of February 29, 2004 in the following manner: a. PECHATEN Filomena L. Moricca, Jaime L. Legarda, Celso L. Legarda, Carlos Enrique S. Legarda, Ignacio Alfonso S. Legarda, Ma. Teresa L. Boentaran, Jose L. Legarda, Jr., Benito L. Legarda, Ma. Antonia L. Legarda, Eduardo L. Legarda BLK LOT TCT NO. AREA LOCATION NO. NO. (sq.m.) RP 4 1 91029 96.50 Extramadura cor. Lealtad Streets, Sampaloc, Manila RP 33 3 90939 180.00 Verdad Street, Sampaloc, Manila RP 33 5 90941 180.00 Verdad Street, Sampaloc, Manila RP 33 7C 234457 46.30 Honradez cor. Verdad Streets, Sampaloc, Manila RP 33 7D 234458 47.90 Honradez cor Verdad Streets, Sampaloc, Manila RP 33 10 90946 180.00 Ma. Cristina Street, Sampaloc, Manila RP 48 2 90953 180.00 Constancia Street, Sampaloc, Manila RP 48 17 90967 180.00 Prudencio Street, Sampaloc, Manila RP 48 29 90979 180.00 Prudencio Street, Sampaloc, Manila RP 48 39A 166466 90.00 Algeciras Street, Sampaloc, Manila RP 52 7B 159137 90.00 Constancia Street, Sampaloc, Manila Blk 5E 32 90824 150.00 Norma Street, Sampaloc, Manila BIk 5E 33 90825 150.00 Norma Street, Sampaloc, Manila Blk 5E 68 90853 150.00 Samar Street, Sampaloc, Manila Blk 31 6 90890 150.00 Craig Street, Sampaloc, Manila Blk 31 7 90891 150.00 Craig Street, Sampaloc, Manila Blk 31 8 90892 150.00 Craig Street, Sampaloc, Manila Blk 31 9 90893 150.00 Craig Street, Sampaloc, Manila Blk 31 10 90894 150.00 Craig Street, Sampaloc, Manila Blk 31 19 90903 150.00 Kundiman Street Sampaloc, Manila Blk 31 30 90913 150.00 Kundiman Street, Sampaloc, Manila Blk 56 3 91021 150.00 San Jose Street, Sampaloc, Manila BIk 56 18 156936 1.22 Romblon Street, Sampaloc, Manila Plan 8 7 90867 650.70 Sta. Teresita cor. G. Tuazon Streets, Sampaloc, Manila Plan 8 16P 90871 1,546.90 Sta. Teresita Street, Sampaloc, Manila Plan 8 19B 245048 28.40 Mabini Street (interior), Sampaloc, Manila Plan 8 19D 245050 45.80 Mabini Street (interior), Sampaloc, Manila Plan 8 19G 245053 52.70 Mabini Street (alley), Sampaloc, Manila alley Plan 8 22 90874 209.10 Sta. Teresita Street (interior), Sampaloc, Manila Plan 8 23A 136570 8.20 Sta. Teresita Street Sampaloc, Manila Plan 8 24 90876 225.50 Sta. Teresita Street (interior) Sampaloc, Manila Plan 8 52P 90877 30.30 Sta. Teresita cor. G. Tuazon Streets, Sampaloc Manila Plan 8 52P 90877 97.70 Sta. Teresita cor. G. Tuazon Streets, Sampaloc, divr's Manila quarter Plan 8 80F 245138 21.00 Mabini Street (interior), Sampaloc, Manila Plan 8 80G 245139 326.50 Mabini Street (interior), Sampaloc, Manila Plan 8 80J 245142 57.00 Mabini Street (interior), Sampaloc; Manila Alley b. ALEGAR Filomena L. Montinola, Alejandro Legarda, Jr., Carmen L. Nelson, and Ramon H. Legarda BLK LOT TCT NO. AREA LOCATION NO. NO. (sq.m.) RP33 7A 234455 47.50 Honradez cor. Verdad Streets, Sampaloc, Manila RP 33 14 90950 187.50 Honradez cor. Ma. Cristina Sts., Sampaloc, Manila RP 48 21 90971 180.00 Prudencio Street, Sampaloc, Manila RP 52 21 91017 180.00 Prudencio Street, Sampaloc, Manila Blk 31 4 90888 150.00 Craig Street, Sampaloc, Manila Blk 31 5 90889 150.00 Craig Street, Sampaloc, Manila Blk 31 17 90901 150.00 Kundiman Street, Sampaloc, Manila Blk 56 6 91024 150.00 Batanes cor. Romblon Streets, Sampaloc, Manila Plan 8 8 90868 348.30 Sta. Teresita Street, Sampaloc, Manila Plan 8 16P 90871 943.20 Sta. Teresita Street, Sampaloc, Manila c. BENLEG i. Benito Legarda, Jr. BLK LOT TCT NO. AREA LOCATION NO. NO. (sq.m.) Blk 5E 48 B 90839 150.00 Norma Street, Sampaloc, Manila Plan 8 80E 245137 97.60 Mabini Street (interior), Sampaloc, Manila Blk 31 35 90918 150.00 Kundiman St., Sampaloc, Manila ii. Estate of Carmita Legarda BLK LOT TCT NO. AREA LOCATION NO. NO. (sq.m.) RP 33 7B 234456 45.80 Honradez cor. Verdad Streets, Sampaloc, Manila RP 48 28A 149542 90.00 Prudencio Street, Sampaloc, Manila Plan 8 80D 245136 86.00 Mabini Street (interior), Sampaloc, Manila that the property will be distributed at book value and the book value of the property dividends will be charged against retained earnings of Terocel as of December 31, 1997, which is more than sufficient to cover such property dividend declaration at book value; and that on May 20, 2004, the Securities and Exchange Commission (SEC) approved Terocel's declaration of property dividends in the total amount of PhP 174,785.18. In the light of the foregoing, you would like us to confirm the following: "1. The property dividends declared consisting of real estate shall be recorded at their respective book value in the books of both Terocel and the recipient stockholders of Terocel; "2. The stockholders of Terocel shall not be subject to any income tax, capital gains tax or withholding tax upon their receipt of the real properties as property dividends since these formed part of Terocel's unrestricted retained earnings as of December 31, 1997; "3. That the Deeds of Conveyance to be executed by Terocel and its recipient stockholders covering the properties, not being a sale and being without monetary consideration, shall not be subject to any documentary stamp tax other than the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code." In reply thereto, please be informed as follows: 1. The property dividends shall be recorded at their book value in the books of both the issuing corporation and the recipient stockholders. ( BIR Ruling No. 156-94 dated November 16, 1994; DA-292-97 dated August 28, 1997; DA-583-99 dated October 6, 1999 ) Consequently, the property dividends declared consisting of real estate shall be recorded at their respective book value in the books of both Terocel and the recipient stockholders of Terocel. 2. Prior to the amendments introduced into the Tax Code by R.A. 8424, which became effective on January 1, 1998, corporate dividend distribution was, in general, exempt from income tax. Beginning on the said date, dividend became subject to final withholding tax provided, however, "that the tax on dividends shall apply on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed after January 1, 1998, be subject to this tax" (Sec. 24(B)(2), Tax Code, as amended by R.A. No. 8424). The provision of Section 73(C) of the Tax Code of 1997 on source of dividend distributions provides that "any distribution made to the shareholders or members of a corporation shall be deemed to have been made from the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received." This proviso originated from the original Tax Code of 1939 (C.A. No. 466), during which time, dividend was taxable. ASEIDH Accordingly, to reconcile the existing law on source of the dividend distribution with that of the proviso of Section 24(B)(2) of the Tax Code of 1997, this Office, in BIR Ruling DA-061-01 dated April 10, 2001, held that if a corporation had accumulated profits as of December 31, 1997, its distribution of dividends beginning 1998 and thereafter must come from the most recently accumulated profits unless a board resolution by the Board of Directors has been issued stating that the said dividend declared forms part of the Retained Earnings as of December 31, 1997. SUCH BEING THE CASE, cash and property dividends declared and distributed by Terocel to its stockholders who are residents of the Philippines on or after January 1, 1998, and forming part of retained earnings as of December 31, 1997, as disclosed Terocel's Board Resolution dated February 25, 2004, stating said dividends as such and as recorded and established in the corporation's books of accounts, shall not be subject to income tax pursuant to Section 24(B)(2) of the Tax Code of 1997. Consequently, the subject property dividends in the amount of P174,785.18 shall not be subject to any withholding tax. ( BIR Ruling No. 203-99; DA-268-98 dated June 25, 1998; DA-061-01 dated April 10, 2001; DA-246-03 dated July 25, 2003 ) 3. The transfer of the Sampaloc properties to the above-named stockholders in the manner provided above, not being in connection with a sale and the same is without monetary consideration, shall therefore, not be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. However, the deed of conveyance on the said transfer shall be subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the same Code. ( BIR Ruling No. 156-94 dated November 16, 1994; DA-263-97 dated August 6, 1997, DA-268-98 dated June 25, 1998; DA-488-99 dated August 26, 1999; DA-061-01 dated April 10, 2001; DA-246-03 dated July 25, 2003 ) However, property dividends which constitute stocks in trade or properties primarily held for sale or lease, which shall be distributed by Terocel to its stockholders and declared out of their retained earnings, beginning January 1, 1996 and thereafter, shall be subject to VAT based on the market value or zonal valuation whichever is higher, at the time of receipt. ( BIR Ruling No. DA-173-97 dated April 16, 1997. ) ESacHC 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group