Fernandez Aguja Law Firm

February 5, 2009 BIR RULING [DA-(C-032) 062-09] SEC. 39 (A) (1); RR 7-2003; DA 420-05 dtd 10/10/05 Fernandez Aguja Law Firm Suite 5F JL Bldg., Don Jose Avila cor. Don Gil Garcia Streets, Cebu City Attention: Atty. Luna Mae F. Aguja Partner Gentlemen : This refers to your letter dated January 27, 2009 requesting on behalf of your client, Rosita Realty Development Corporation ("RRDC", for brevity), confirmation of your opinion that the vacant and/or idle real property (land) covered by Transfer Certificate of Title (TCT) No. 45561 issued by the Registry of Deeds for Lapulapu City, which was never used by RRDC in its trade or business, nor held primarily for sale or lease to customers in the ordinary course of trade or business is classified as capital asset in the hands of RRDC, hence, the sale thereof shall be subject to the 6% capital gains tax and 1.5% documentary stamp tax but is exempt from the 12% value-added tax. It is represented that RRDC is a corporation engaged in leasing real properties; that in year 2000, RRDC acquired for investment purposes, a parcel of land located in Basak, Lapulapu City covered by TCT No. 45561 of the Registry of Deeds of Lapulapu City covering an area of 25,800 square meters; that since the time of its acquisition more than eight (8) years ago, the said parcel of land has remained vacant and idle and never been developed or used by RRDC in the ordinary course of its business as RRDC has not introduced any improvement on said property as evidenced by the latest Tax Declaration on the said property and a certificate of no improvement issued by the City Assessors Office; and that, as borne in the Company's Statement of Income and Retained Earnings for years 2006 and 2007, RRDC derived income solely from lease of properties. It is further represented that from the time of its acquisition in the name of RRDC, this property has never been held or owned primarily by RRDC for sale to customers in the ordinary course of its trade or business nor has the said parcel of land been leased to anybody as it has always been treated by RRDC as capital asset; and that this land has never formed part of its inventories held for lease in its financial statements but has been classified as a capital asset in its financial statements. Based on the foregoing representations, you now request for confirmation of your opinion that: CSEHcT 1. The vacant and/or idle real property (land) covered by Transfer Certificate of Title No. 45561 of the Registry of Deeds of Lapulapu City which was acquired by RRDC for investment purposes and which has remained vacant and idle since the time of its acquisition more than 8 years ago and which has never been developed or used by RRDC in the ordinary course of its business, nor held out or owned primarily by RRDC for sale to customers in the ordinary course of its trade or business nor leased out to anybody is classified as capital asset in the hands of RRDC; 2. The sale of the said vacant and/or idle real property covered by Transfer Certificate of Title No. 45561 classified as capital asset in the hands of RRDC is subject to the 6% capital gains tax pursuant to Section 27 (D) (5) of the Tax Code of 1997 and to the Documentary Stamp Tax at the rate of 1.5% of the consideration or fair market value of the property whichever is higher pursuant to Section 196 of the same Code; and 3. The sale of the said vacant and/or idle real properties, not being used in the ordinary course of the trade or business of RRDC is exempt from the 12% value-added tax. In reply, please be informed that pursuant to Section 27 (D) (5) of the Tax Code of 1997, 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 land and/or buildings which are actually not used in the business of a corporation and are treated as capital assets, based on the gross selling price, or fair market value, whichever is higher. This rule applies whether or not the seller-corporation is engaged in the real estate business. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, shall apply. The rate of withholding tax will depend on whether, first, the seller is exempt or taxable; second, whether the seller is habitually engaged in real estate business or not; and third, if the seller is habitually engaged in real estate business, the gross selling price, as that term is defined in the above-mentioned Revenue Regulations. ( BIR Ruling No. DA-152-04 dated March 31, 2004; BIR Ruling No. 27-02 dated July 3, 2002 ) If the taxpayer selling real property is one engaged in the real estate business, the guidelines for determining whether the property is a capital or ordinary asset as laid down in Section 3 of Revenue Regulations 7-2003 shall apply, viz: "SEC. 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or Ordinary Asset . a. Taxpayers engaged in the real estate business. Real property shall be classified with respect to taxpayers engaged in the real estate business as follows: 1. Real Estate Dealer. All real properties acquired by the real estate dealer shall be considered as ordinary assets. 2. Real Estate Developer. All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition, and all real properties which are held by the real estate developer primarily for sale or for lease to customers in the ordinary course of his trade or business or which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets. 3. Real Estate Lessor. All real properties of the real estate lessor, whether land and/or improvements, which are for lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade or business shall likewise be considered as ordinary assets . IDAESH 4. Taxpayers habitually engaged in the real estate business. All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real estate shall be considered as ordinary assets. Registration with the HLURB or HUDCC as a real estate dealer or developer shall be sufficient for a taxpayer to be considered as habitually engaged in the sale of real estate. If the taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be deemed to be engaged in the real estate business through the establishment of substantial relevant evidence (such as consummation during the preceding year of at least six (6) taxable real estate sale transactions, regardless of amount; registration as habitually engaged in real estate business with the Local Government Unit or the Bureau of Internal Revenue, etc.). A property purchased for future use in the business, even though this purpose is later thwarted by circumstances beyond the taxpayer's control, does not lose its character as an ordinary asset. Nor does a mere discontinuance of the active use of the property change its character previously established as a business property." (underscoring supplied) Based on the foregoing, only such real properties held by a real estate lessor primarily for lease/rent or being offered for lease/rent to customers in the ordinary course of its real estate business, and therefore, would be properly included in the inventory of such taxpayer if on hand at the close of the taxable year, or used in his trade or business, are appropriately classified as ordinary assets. Hence, if the real properties of a real estate lessor are other than those enumerated under Sections 2 (b) and 3 (A) (3) of Revenue Regulations No. 7-2003, in relation to Section 39 (A) (1) of the Tax Code, they are properly deemed as capital assets. Inasmuch as the real property intended to be sold by RRDC is recorded in its books as capital asset, and considering further that it is idle and vacant and had not been used in the ordinary course of trade, nor classified as properties of a kind which would properly be included in the inventory if on hand at the close of the taxable year, nor held by the taxpayer primarily for sale or lease to customers in the ordinary course of trade or business, it is the considered opinion of this Office that the said property is considered a capital asset. As such, the income derived from the sale thereof is not subject to the expanded withholding tax under Sec. 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 Tax Code of 1997, whichever is higher. (BIR Ruling Nos. DA-217-99 & DA-010-02 dated April 12, 1979 and January 29, 2002) Accordingly, we hereby confirm your opinion that: 1. The subject property of RRDC, which has remained vacant, idle, unproductive and unimproved since the time of acquisition, does not fall under any of the assets enumerated under Section 39 (A) (1) of the Tax Code of 1997 and Section 2 (b) of Revenue Regulations No. 7-2003 and are properly classified as capital assets; 2. The sale of the aforesaid property covered by TCTs No. 45561, which is classified as capital asset, is subject to capital gains tax at the rate of 6% on the gain presumed to have been realized from the sale or transfer pursuant to Section 27 (D) (5) of the Tax Code of 1997 and to the Documentary Stamp Tax 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 property whichever is higher pursuant to Section 196 of the same Code. (BIR Ruling Nos. DA-152-2004 dated March 31, 2004, DA-155-2005 dated April 14, 2005 and DA-168-2005 dated April 15, 2005) ; and aATHIE 3. The sale of the said vacant and/or idle real property, not being used in the ordinary course of the trade and business of RRDC, is not subject to the 12% value added tax. (BIR Rulings Nos. DA-024-2001 dated February 26, 2001 and DA-397-2000 dated November 20, 2000) 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