BIR Ruling [DA-574-04]

November 12, 2004 BIR RULING [DA-574-04] Princess Dana Realty Corporation 8022 Tanquille Street San Antonio Village Makati City Attention: Mr. Dominador S. Quizon President Gentlemen : This refers to your letter dated June 29, 2004 stating that Princess Dana Realty Corporation is a domestic corporation registered with the Securities and Exchange Commission (SEC); that on June 6, 2000, a Deed of Assignment was executed by and between Annabelle Quizon Ajjaoqui and Princess Dana Realty Corporation whereby the former transferred to the latter a parcel of land covered by TCT No. 216025 issued by the Registry of Deeds for Makati City in exchange for the shares of stock of the latter; that on November 7, 2003, a majority of the Board of Directors and by the vote of the stockholders owning or representing at least two-thirds of the outstanding capital stock have approved a resolution amending Article IV of the Articles of Incorporation of the Princess Dana Realty Corporation by shortening the term of its existence thereby dissolving the said corporation and was approved by the SEC on January 8, 2004; that at the time of the dissolution, Princess Dana Realty Corporation has only one (1) remaining property covered by TCT No. 216436 issued by the Registry of Deeds for Makati City with a zonal value of P6,407,400.00; and that upon liquidation, Princess Dana Realty Corporation will distribute the aforesaid property to its stockholders, Annabelle Quizon Ajjaoqui et al., of record to represent as a return of capital invested. Based on the foregoing representations, you now request confirmation of your opinion that the transfer of the aforesaid property to its stockholders in the form of liquidating dividends relative to the dissolution of Princess Dana Realty Corporation is not subject to income tax, capital gains tax, value-added tax and documentary stamp tax. In reply thereto, please be informed that the above transfer of property in favor of the stockholders of Princess Dana Realty Corporation 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) both of the Tax Code of 1997, as amended, 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. 039-02 dated November 11, 2002 cited in BIR Ruling No. DA-171-03 dated June 3, 2003 ). Anent the above, Section 73(A) of the Tax Code of 1997, as amended, provides in part, that "where a corporation distributes all its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is taxable income or deductible loss, as the case may be. dctai In BIR Ruling No. 039-02 dated November 11, 2002, the Commissioner had ruled that the liquidating gain, i.e., the difference between the fair market value of the properties received vis--vis the cost basis of the shares to the stockholders, derived by an individual stockholder who is a citizen or a resident alien is subject to the ordinary income tax rates prescribed under Section 24(A)(1) of the Tax Code of 1997, as amended, or under Section 25(A)(1) and (B) thereof, in case of a nonresident alien individual. Accordingly, the gain, if any, derived by the stockholder of Princess Dana Realty Corporation shall be subject to the regular income tax imposed under Section 24 of the Tax Code, as amended. 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 documentary stamp tax 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 1 such assets to the latter. Accordingly, the transfer by Princess Dana Realty Corporation of its property to the stockholders, in proportion to their respective shareholdings, shall not be subject to DST imposed under said Section 196 of the Tax Code, as amended. The notarial certification on the deed of assignment is, however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Tax Code. Finally, the stockholders who sell the real property received by them as liquidating dividends immediately after title thereto is transferred to their name 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. It bears emphasis, however, that prior to dissolution, the Bureau must investigate and determine that Princess Dana Realty Corporation has no outstanding tax obligation, and if it has, the same must be settled fully before it can dissolve and distribute its remaining assets to its stockholders. 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. HScDIC Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group Footnotes 1. BIR Ruling No. 039-02, supra .