Cayetano Sebastian Ata Dado & Cruz Law Offices

October 26, 2007 BIR RULING [DA-573-07] 27 (D) (5); 39 (A) (1); DA-476-2007 Cayetano Sebastian Ata Dado & Cruz Law Offices 12/F, NDC Building, 116 Tordesillas St. Salcedo Village, Makati City Attention: Jose Luis G. Montales Gentlemen : This refers to your letter dated October 23, 2007 requesting on behalf of your client, STANDARD INVESTMENT CORPORATION ( "SIC" for brevity ), for a ruling on the tax consequences of the sale of your client's property covered by Transfer Certificate of Title (TCT) No. 190604 in Ermita, Manila. TcDAHS It is represented that SIC is a domestic corporation duly registered with the Securities and Exchange Commission under S.E.C. Registration No. 4339, primarily engaged in investment activities; that the said primary purpose of SIC remains unchanged since its incorporation up to the present; that SIC is the registered owner of a parcel of land in Ermita, Manila covered by TCT No. 190604 issued by the Registry of Deeds for Manila containing an area of 1,200.50 square meters; that the said property has not been used by SIC in its trade or business, nor held primarily for sale or lease to customers in the ordinary course of its trade or business; that SIC has not derived any income from the said property; that SIC 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 Ermita, Manila property of SIC should be classified as a capital asset and will be subjected to a 6% capital gains tax and 1.5% documentary stamp tax but exempt from the 12% value-added tax (VAT). In reply, please be informed that Section 27 (D) (5) of the 1997 Tax Code, as amended, provides that a final tax of six percent (6%) is hereby 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. ITaCEc 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, as amended, 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, as amended, 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. IcHTAa From the foregoing, and based on your representations that the subject real property has long been idle; that it has not been leased out nor held out for sale in the ordinary course of trade or business; and that SIC has not derived any rental income from it, 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 6% capital gains tax imposed under Section 27 (D) (5) of the 1997 Tax Code, as amended, and to the documentary stamp tax of 1.5% imposed under Section 196 of the same Code, based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the 1997 Tax Code, as amended, whichever is higher. Finally, considering that the property is properly classified as a capital asset, its sale, therefore, is not subject to the 12% value-added tax (VAT) imposed under Section 106 of the 1997 Tax Code as amended. THaDAE This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, however, it is 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