BIR Ruling [DA-660-06]

November 7, 2006 BIR RULING [DA-660-06] Sections 57 (B); 27; RR 2-98; DA-178-03; 236-03 Miguel C. Pea Attorney-at-Law Rm. 114 Ortigas Building, Ortigas Avenue cor. Meralco Avenue, Pasig City S i r : This refers to your letter dated October 18, 2006 requesting confirmation of your opinion that the conveyance or transfer of the common areas of the Palladium Subdivision, by the property owner and property developer in favor of the Palladium Homeowners Association, Inc. (PHA),is exempt from the payment of capital gains, documentary stamp, income, creditable withholding, value-added and donor's taxes. The facts, as you represent, are as follows: Real Properties, Inc. (RPI),a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, owned a parcel of land situated along Shaw Boulevard, Mandaluyong City, with an area of Fifty Seven Thousand Two Hundred Nineteen square meters (57,219 sqm.),more or less, and covered by Transfer Certificate of Title (TCT) No. 63007 issued by the Registry of Deeds of Mandaluyong City. Fil-Estate Management, Inc. (Fil-Estate) a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, is engaged in the business of real estate development. On 08 September 1987, RPI and Fil-Estate executed a Development Agreement, which embodied the terms and conditions for the development of a subdivision project over the above-described parcel of land of RPI, which project was later on known as Palladium Subdivision. ASHICc In order to develop the Palladium Subdivision, RPI and Fil-Estate caused the subdivision of the above-described parcel of land into several lots, for which individual transfer certificates of title were issued. Among the lots created and for which individual titles were issued are the following: 1. TCT No. 382 of the Registry of Deeds of Mandaluyong City, which parcel of land constitutes an alley road in Palladium Subdivision, with an area of one hundred twenty three square meters (123 sqm.),more or less; 2. TCT No. 334 of the Registry of Deeds of Mandaluyong City, which parcel of land constitutes an open space in Palladium Subdivision, with an area of Five Hundred Seventy Two square meters (572 sqm.),more or less; 3. TCT No. 379 of the Registry of Deeds of Mandaluyong City, which parcel of land constitutes an open space in Palladium Subdivision, with an area of Three Hundred Forty Eight square meters (348 sqm.),more or less; 4. TCT No. 391 of the Registry of Deeds of Mandaluyong City, which parcel of land constitutes an open space in Palladium Subdivision, with an area of Two Thousand Seven Hundred Forty Five square meters (2,745 sqm.),more or less; and 5. TCT No. 416 of the Registry of Deeds of Mandaluyong City, which parcels of land constitute the various subdivision roads (Road Lots 1, 2, 3, 4, and 5) of Palladium Subdivision, with a total area of Eleven Thousand Six Hundred Seventy Two square meters (11,672 sqm.),more or less. On 22 September 1993, PHA was duly registered with the Home Insurance and Guaranty Corporation (HIGC).PHA is a homeowners association comprised of residents and lot owners in Palladium Subdivision and is in charge of the day-to-day management of the affairs within Palladium Subdivision. It is the intention of PHA that the registration of the titles to the above-mentioned alley road, open spaces and road lots, which comprise the common areas within Palladium Subdivision, be transferred to its name for the purpose of maintaining and promoting the common safety and enjoyment of the same by the homeowners of Palladium Subdivision. Considering that RPI and Fil-Estate have long completed the development works and improvements in Palladium Subdivision, and as a consequence thereof, and in the interest of the residents and lot owners of PHA, RPI and Fil-Estate agreed to transfer and convey, without any monetary consideration, all of their rights, title and interest in the above-mentioned alley road, open spaces and road lots, which comprise the common areas within Palladium Subdivision, to PHA. For this purpose, RPI, Fil-Estate and PHA intend to execute a Deed of Conveyance over the abovementioned properties. In reply, please be informed that since the Deed of Conveyance was made without consideration and is not in connection with a sale made to PHA, no taxable income will be generated and a fortiori , no creditable withholding tax is payable and collectible. The purpose of the conveyance to PHA is for the management of the project for the common benefit of the unit-owners. (Section 10, R.A. 4726) CScaDH Moreover, Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26)provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Further, since the conveyance of common areas to PHA being without monetary consideration and is not in connection with a sale, it is likewise not subject to VAT imposed under Section 106 of the Tax Code of 1997, as amended, nor to capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997, as amended. In view thereof, this Office is of the opinion as it hereby holds that the aforesaid transaction is not subject to the creditable withholding tax prescribed by Section 2.57(B) of Revenue Regulations No. 2-98, implementing Section 57(B), in relation to Section 27 of the Tax Code of 1997, as amended. Neither is it subject to the documentary stamp tax imposed under Section 196 of the same Code. However, the notarial acknowledgement to said deed of conveyance is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. Finally, the said conveyance is not a donation and therefore, the same is likewise not subject to donor's tax. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service