BIR Ruling [DA-681-06]

November 29, 2006 BIR RULING [DA-681-06] Sec. 24 (D); 27 (D) (5); DA 581-04 Mr. Joselito Q. Yap 110 Calypso Street Acropolis Greens Subdivision Bagumbayan, Quezon City S i r : This refers to your letter dated October 30, 2006 requesting for a ruling on the tax implications of the transfer of eight (8) parcels of land by Foss Manufacturing Philippines, Inc. (FOSS) to its sole stockholder in the form of liquidating dividends. It is represented that FOSS is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with SEC Registration No. 61610 dated May 21, 1975 with principal office address at Kapalaran Street, Barangka, Mandaluyong City; that it is the registered owner of eight (8) parcels of land covered by TCT Nos. 13864, 13865, 13866, 13867, 13868, 13869, 13870 and 13871 all issued by the Registry of Deeds for Mandaluyong City; that FOSS had ceased operations since it lost the foreign market for its product more than twelve years ago and none of its stockholders wanted to pursue anymore the business for which it was formed; that all its employees have long been lawfully terminated from service; that the corporation is absolutely free of any liability to any person or to the National government and its instrumentalities; that in a Special Stockholders Meeting held on December 27, 2005, it was officially resolved that it will formally terminate its corporate life as of December 31, 2005; and that FOSS, by virtue of the Board Resolution, will now distribute the said properties to its sole stockholder as liquidating dividends as one of the final stages in the winding up of its affairs. In reply thereto, please be informed that the above transfer of properties in favor of its sole stockholder 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) 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 assets to its stockholder 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. DA 521-04 dated October 6, 2004 ) 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 DST imposed under Section 196 of the Tax Code of 1997, as amended. The distribution of the assets of the corporation to its stockholder in liquidation of the business without consideration is viewed as a return of capital to the shareholder. 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 shareholder as liquidating dividends is not deemed to be selling such assets to the latter. Accordingly, the transfer by FOSS of the above-described properties to the stockholder, in proportion to its respective shareholdings, shall not be subject to DST imposed under said Section 196 of the Tax Code of 1997, as amended. The notarial certification on the deeds of transfer/assignment is, however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Code. Furthermore, the stockholder who sells the real properties received by it as liquidating dividends immediately after titles thereto are transferred to its name is 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. Finally, since FOSS, from the time it was organized was never engaged in the sale of real properties, the transfer of the above-described properties in the form of liquidating dividends to its sole stockholder is not subject to value-added tax prescribed in Section 106(B)(4) of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337, as implemented by Revenue Regulations No. 16-2005. ( BIR Ruling No. DA353-03 dated October 10, 2003 ) 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. ACETIa Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service