BIR Ruling [DA-692-06]

December 7, 2006 BIR RULING [DA-692-06] 27 (D) (5); 014-03 EBE Capital Holdings, Inc . (formerly EBECOM Holding Company, Inc.) Unit 2123 Herrera Tower V.A. Rufino Street Salcedo Village Makati City Attention: Mr. Alberto V. Olayer Gentlemen : This refers to your letter dated November 6, 2006 stating that EBE Capital Holdings, Inc. (EBECAP) is a corporation duly organized and existing under the laws of the Philippines; that EBECAP has purchased properties purely as capital investment; that it did not enter into any undertaking for the development of its real properties, to wit: A) Splendido Gardens Salcedo Condominium Unit Sometime in March 1995 EBECAP purchased a condominium unit at Splendido Gardens Salcedo covered by Condominium Certificate of Title (CCT) No. 34590; that said condominium unit was not used by EBECAP in its business and is classified in its financial statement as a capital asset; that the said property was not included in the stock in trade or inventory, nor held primarily for sale in the ordinary course of EBECAP's trade or business. B) San Jose Del Monte, Bulacan In September 1996 and June 1997, EBECAP purchased two (2) agricultural land located at Municipality of San Jose del Monte, Bulacan covered by TCT Nos. T-25649P(M) and T-27550(M), respectively; that said properties are vacant and/or idle which were never used by EBECAP in its trade or business and are classified as capital assets in its financial statement and were never subjected to depreciation. C) Cleveland Tower Condominium Unit and Parking Slots In May 1997, EBECAP again purchased a condominium unit with four (4) parking slots at Cleveland Tower covered by CCT Nos. 6307, 6308, 6309, 6310 and 6311; that said condominium unit and parking slots were also not used by EBECAP in its business and are classified in its financial statement as capital assets; that said condominium unit and parking slots were not included in the stock in trade or inventory, nor held primarily for sale in the ordinary course of EBECAP's trade or business. EHcaDT Based on the foregoing representations, you now request for confirmation of your opinion that the above-mentioned properties which have been idle and not used in business should be classified as capital assets and therefore the sale thereof is subject to the 6% capital gains tax and the corresponding documentary stamp tax but is not subject to the 12% value-added tax (VAT). In reply thereto, please be informed that Section 27(D)(5) of the Tax Code of 1997, as implemented by Revenue Regulations No. 7-2003, provides "(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings . A final tax of six percent (6%) is hereby imposed on the gain 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 fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings." It is undisputed that the yardstick for determining whether the property is capital asset or ordinary asset is the actual use of the said property. Thus, if the property is not actually used in trade or business of the taxpayer, whether or not connected with his trade or business, or not held for lease or sale to customers, it will be classified as a capital asset. Moreover, if the property is merely held for investment purposes and remains vacant and idle, it is deemed a capital asset. In stressing the rationale of the above-mentioned rule, this Office elucidated the matter in BIR Ruling No. 014-2003 dated October 28, 2003 , as follows: "It is apparent under the foregoing provision that for a property to be considered an ordinary asset it must be actually used in the business of the corporation. Accordingly, on the condition that Wendell Holdings Co., Inc. is not habitually engaged in the real estate business as represented, the property under consideration is a capital asset. The property was neither held primarily for sale to customers nor actually used in the business of Wendell Holdings Co., Inc. . . . The property is not actually used in the business of Wendell Holdings Co., Inc. as it has remained idle and undeveloped. Therefore, the sale of the property under consideration is a sale of a capital asset, not an ordinary asset. As such, the transaction is subject to capital gains tax of 6% under Section 27(D)(5) and not to the creditable withholding tax." At this juncture, observation may be made of the fact that real property which is idle and vacant and had not been used in the ordinary course of trade or business nor had it ever been classified as property of a kind which would properly be included in the inventory if on hand at the close of the taxable year, nor had it ever been held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, the income derived from the sale thereof is not subject to the expanded withholding tax under Section 2.57.2(J) of Revenue Regulations No. 2-98, but only to the 6% capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the same Code, based on the gross selling price or fair market value (FMV) as determined in accordance with Section 6(E) of the Code, whichever is higher. Lots or improvements, classified as "investment properties", which are idle, unproductive and unimproved since the time of acquisition, and do not fall under any of the assets enumerated under Section 39(A)(1) of the Tax Code of 1997 and 2(b) of Revenue Regulations No. 7-2003 are classified as capital assets, the sale of which is subject to 6% capital gains tax, DST of 1.5% but exempt from 10% (now 12%) VAT. ( BIR Ruling No. DA152-04 dated March 31, 2004 ) Accordingly, we hereby confirm your opinion that the proposed sale of the abovementioned properties which have remained idle and considered as capital assets, is: (1) subject to the capital gains tax of 6% pursuant to Section 27(D)(5) of the Tax Code of 1997; (2) subject to DST at the rate of P15.00 for each P1,000.00 or fractional part thereof in excess of P1,000.00, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196 of the Tax Code of 1997; STaCIA (3) exempt from the expanded withholding tax prescribed in Revenue Regulations No. 2-98, as amended; and (4) exempt from 12% VAT, the property not being primarily held and offered for sale or lease to customers in the ordinary course of PIC's trade or business, as provided under Section 109(w) of the Tax Code of 1997. ( BIR Ruling No. DA270-04 dated May 17, 2004 ) 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. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service