Adria Management Development Corporation

September 25, 2008 BIR RULING [DA-(C-080) 256-08] 27 (D) (5); 73; 196; #039-2002; DA-063-2004; DA-496-2004; DA-384-2007; DA-512-2007 Adria Management Development Corporation 1038 A.P. Reyes Street, Makati City Attention: Mr. Luis Ma. Jose G. Sison Corporate Secretary Gentlemen : This refers to your letter dated September 22, 2008 requesting for a ruling on the tax consequences relative to the transfer of a real property together with the improvements thereon by Adria Management and Development Corporation ("Adria") to its stockholders in the form of liquidating dividends. Background Adria is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) on April 1, 1987. It is the registered and absolute owner of a parcel of land together with the improvements thereon covered by TCT No. 148978 issued by the Registry of Deeds of Makati City. Adria is primarily engaged in the business of management, technical and financial consultancy and in pursuance thereof to examine, investigate, analyze and study processes, procedures, systems, conditions, prospects, value, character, and circumstances of any business concern or undertaking and to provide management, marketing, investment, financial and other such or similar technical advice, assistance, services, recommendations and suggestions for corporations, associations, partnerships, firms, trustees, syndicates, individuals, combinations, joint ventures, organizations and other entities, whether domestic or foreign and to act as agent, managers, representatives, attorney-in-fact, broker contractor or any other station of trust or confidence in respect to the establishment and promotion of corporation, associations, or other business firms as well as of their businesses, activities, undertakings and concerns. However, due to unforeseen developments, Adria has never started business operations and all of its stockholders were unable to pursue the business anymore for which it was formed. The corporation is absolutely free of any liability to any person or to the National Government and its instrumentalities. HTSAEa In a Special Stockholders Meeting held on May 15, 2008, it was officially resolved that Adria will formally terminate its corporate existence as of May 30, 2008. By virtue of the said Board Resolution, Adria will now distribute the property to its stockholders 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, as amended, 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 Adria of the above-described properties to the stockholders, in proportion to their 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 deed of transfer/assignment is, however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Code. Furthermore, the stockholders who sell the real properties received by them as liquidating dividends immediately after titles thereto are transferred to their names are subject to the final capital gains tax imposed under Section 24 (D) (1) of the Tax Code of 1997, as amended, in the case of individual distributees and Section 27 (D) (5) thereof, in the case of corporate distributees. Further still, the sale of same real properties received by said stockholder/s as liquidating dividends shall be subject to DST pursuant to Section 196 of the Tax Code of 1997, as amended. HcTIDC 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service