BIR Ruling [DA-608-04]

November 30, 2004 BIR RULING [DA-608-04] 73 (A); 039-92; DA 564-2004 Crest One, Inc. 101 Magsaysay St., Caloocan City Attention: Ms. Rosita Yee Treasurer Gentlemen : This refers to your letter dated August 17, 2004 requesting for a ruling that the transfer by DNL Trucking Corporation of its real properties in favor of Crest One, Inc. by way of liquidating dividends is not subject to corporate income tax, creditable withholding tax, capital gains tax and documentary stamp tax. Documents submitted shows that DNL Trucking Corporation is a domestic corporation registered with the Securities and Exchange Commission (SEC) on August 4, 1999; that its primary purpose is to engage in land transportation and carriage of passengers, goods and merchandise within any place in the Philippines; that on July 8, 2004, in a Special Meeting held at its principal office located at the 17th Floor, Equitable Bank Tower, 8751 Paseo de Roxas, Makati City, DNL Trucking Corporation's Board of Directors and Stockholder/s unanimously approved to dissolve the corporation by shortening its corporate life until August 12, 2004; that they likewise decided that the properties of DNL Trucking Corporation be distributed to Crest One, Inc. (lone stockholder of DNL Trucking Corporation) by way of liquidating dividends; that as a result of the dissolution, the net assets of DNL Trucking Corporation consisting of two (2) parcels of land covered by Transfer Certificates of Title (TCT) Nos. T-85674 with an area of 4,968 sq.m. and T-86151 with an area of 1,070 sq.m. both located at Las Pias City and without any improvements will be transferred to Crest One, Inc.; and that DNL Trucking Corporation has no outstanding debts, and its dissolution will not affect the rights of any creditors whatsoever. In reply, please be informed that the above transfer of properties in favor of Crest One, Inc. 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 and consequently to the withholding tax imposed under Revenue Regulations No. 2-98, as amended. The transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial liquidation. (BIR Ruling No. 039-02 dated November 11, 2002) Consequently, DNL Trucking Corporation is not liable for income tax on either the transfer of its assets to its stockholder, or on its receipt of the shares surrendered by Crest One, Inc. TAEcSC Anent the above, Section 73 (A) of the Tax Code of 1997, provides in part, that "where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or deductible loss, as the case may be." In BIR Ruling No. DA-564-2004 dated November 9, 2004, it was 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 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 non-resident alien individual. Applying the foregoing, the gain, if any, derived by the stockholder/s of DNL Trucking Corporation shall be subject to the regular income tax imposed under Section 27 of the 1997 Tax Code. 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 stockholders. 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 dividend is not deemed to be selling such assets to the latter. Accordingly, the transfer by DNL Trucking Corporation of its properties to Crest One, Inc. shall not be subject to documentary stamp tax imposed under said Section 196 of the Tax Code, as amended. Likewise, no documentary stamp tax under Section 176 of the 1997 Tax Code, as amended, shall be due on the surrender by Crest One, Inc. of its shares of stock to DNL Trucking Corporation. The surrender of the shares does not constitute a sale, assignment or transfer because DNL Trucking Corporation is not taking title of the surrendered shares, and the shares will be retired and not retained as treasury shares. In effect, DNL Trucking Corporation will not realize any benefit, as owner or otherwise from its receipt of the said shares. However, the notarial certification on the Deed of Conveyance is, however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Tax Code. Finally, if Crest One, Inc. will eventually sell the aforestated real properties received as liquidating dividends immediately after title thereto is transferred to its name, the same will be subject to the final capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997. HCSDca It bears emphasis, however, that prior to dissolution, the Bureau must investigate and determine that DNL Trucking 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 ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group