Holy Cross Investment Corporation

February 18, 2009 BIR RULING [DA-(C-027) 099-09] 27 (D) (5); 39 (A) (1); DA-(C-022)104-2008 Holy Cross Investment Corporation Rm. 203 Ledesma Bldg. Real cor. Gen. Luna Sts. Manila Attention: Benjamin J. Ledesma President Gentlemen : This refers to your letter dated February 03, 2009 requesting for confirmation of your opinion that the sale of your company's real property which has long been idle and not used in business should be classified as a capital asset and, therefore, subject to the 6% capital gains tax and 1.5% documentary stamp tax but exempt from the 12% value-added tax. SHacCD It is represented that Holy Cross Investment Corporation is a domestic corporation duly registered with the Securities and Exchange Commission; that Holy Cross Investment Corporation is a holding company primarily organized to acquire, hold, sell, exchange, deal and invest in the stocks, bonds, commercial papers, instruments, treasury bills, or securities of any government thereof or any public or private corporation; that Holy Cross Investment Corporation is neither a real estate dealer nor a real estate developer and it has never engaged in the real estate business; that Holy Cross Investment Corporation is the registered owner of a real property covered by Transfer Certificate of Title No. 144862 located at Pasay Road cor. Gladiola St., Dasmarias Village, Makati City issued by the Registry of Deeds for Makati City containing an area of 1,079 square meters; that the said property has never been used by Holy Cross Investment Corporation in its trade or business, nor subjected to depreciation, nor held primarily for sale or lease to customers in the ordinary course of business, and never been offered for rent or actually leased to anybody since its acquisition; that Holy Cross Investment Corporation did not derive any income at all from the said property; that as such, Holy Cross Investment Corporation has always treated the said property as capital asset; and that it is of the position that the eventual sale of the said realty shall only be subject to 6% capital gains tax and 1.5% documentary stamp tax under Sections 27 (D) (5) and 196 of the Internal Revenue Code of 1997. In reply thereto, please be informed that Section 27 (D) (5) of the Tax Code of 1997, as amended, 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. This is fortified in BIR Ruling No. 014-2003 dated October 28, 2003, where this Office ruled that "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." IaEScC The phrase "taxpayers engaged in the real estate business" refers collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayer not engaged in the real estate business" shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of these Regulations. (Sec. 2 (g), Revenue Regulations No. 7-2003) Inasmuch as Holy Cross Investment Corporation is not primarily engaged in real estate business, but is merely a holding company organized to acquire, purchase, own or hold for investment or otherwise shares of stock, real and personal property, bonds and other securities of any corporation or entity, it is deemed not engaged in the real estate business. Consequently, the sale of said real property is not subject to the expanded withholding tax under Revenue Regulations No. 2-98, as amended, but only to the 6% capital gains tax (CGT) imposed under Section 27 (D) (5) of the 1997 Tax Code, as amended, and also subject to documentary stamp tax (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 same Code. Corollary thereto, Section 14 (B) (p) (1) of Revenue Regulations No. 4-2007, amending Section 4.109-1 (B) (p) (1) of Revenue Regulations No. 16-2005, implementing Republic Act No. 9337 (Reform VAT Law), provides "(p) The following sales of real properties are exempt from VAT, namely: (1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer's main business." The term "primary" is defined as 'first, principal, chief, leading or first in order of time, or development, or intention' (Black's Law Dictionary, Sixth Edition). Thus, to be 'held primarily for sale or lease,' the property must be held with the chief intention of being sold or leased. In VAT Ruling No. 012-02 , it was held that the sale of properties of MGM Motor Trading, Inc. is not subject to VAT since the properties sold were neither primarily held for sale to customers nor for lease in the ordinary course of its trade or business. Also in BIR Ruling No. DA-665-06, dated November 14, 2006 , the BIR has ruled that sale of real properties of Benson Realty & Development Corporation , which are not primarily held for sale to customers in the ordinary course of trade or business nor included as part of its inventory of property for lease, is not subject to the 12% VAT. Likewise, in DA-685-06, dated November 30, 2006, it was reiterated that the sale of real properties of Union Ajinomoto Realty Corporation , not being used in the ordinary course of its trade or business, is not subject to the 12% value-added tax. HAICcD Accordingly, as the property under consideration was neither primarily held for sale or for lease to customers nor actually used in the ordinary course of trade or business of Holy Cross Investment Corporation , the sale thereof is exempt from the 12% value-added tax (VAT) pursuant to Section 14 (B) (p) (1) of Revenue Regulations No. 4-2007, implementing Republic Act No. 9337. (BIR Ruling No. DA(C-022)104-2004 dated August 24, 2008) Such being the case, this Office hereby confirms your opinion that the sale of the above-mentioned property which has long remained idle and considered as capital asset, is: (1) subject to the capital gains tax of 6% pursuant to Section 27 (D) (5) of the Tax Code of 1997, as amended; (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, as amended; and (3) exempt from 12% VAT, the property not being primarily held and offered for sale or lease to customers in the ordinary course of Holy Cross Investment Corporation trade or business, as provided under Section 109 (P) of the Tax Code of 1997, as amended. (BIR Ruling No. DA-270-04 dated May 17, 2004) This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, however, it is disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service