De Guzman Celis & Dionisio Law Offices

June 8, 2009 BIR RULING [DA-(C-086) 284-09] 24 (B) (2); 27; 196; 175; #-277-93, UN 156-94; DA-295-03; DA-618-06; DA-162-06; De Guzman Celis & Dionisio Law Offices Suite C, 15th Floor, Strata 2000 Building F. Ortigas Jr. Road, Ortigas Center 1605 Pasig City Attention: Atty. Mariano L. Celis II and Atty. Amalia A. Dionisio Gentlemen : This refers to your letter dated February 22, 2008 requesting on behalf of your client, Wellington Investment & Manufacturing Corporation ("WIMC" for brevity) for confirmation of your opinion on the tax consequence of its declaration of property dividend. It is represented that WIMC is a domestic corporation with principal office located at WFM Compound, Bo. Pineda, Shaw Boulevard, Pasig City, engaged mainly in flour manufacturing business. It also owns a parcel of land with improvements thereon located at Elcano Street, San Nicolas, Manila and covered by Transfer Certificate of Title No. 169568 of the Register of Deeds of Manila wherein it derives rental income thereon. It has an authorized capital stock of P2 Billion divided into 20 Million shares at par value of P100.00 each share, out of which, P524,845,700.00 worth of shares is outstanding. As of December 31, 2007, WIMC has an unrestricted retained earnings of P660,528,331.00. WIMC desires to declare as property dividend the said property covered by Transfer Certificate of Title No. 169568 of the Register of Deeds of Manila together with improvements thereon, with a total net book value of P33,468,388.91 as of December 31, 2007, out of its unrestricted retained earnings as of December 31, 2007 pro-rata to stockholders of records, to wit: Name No. of Shares Subscribed Amount Subscribed and Paid (P100.00 par value) Wellington & Co., Inc. 2,746,665 P274,666,500.00 Linktop Properties, Inc. 304,846 30,484,600.00 Wilan Resources Corp. 304,091 30,484,600.00 Winrolin Dev. Corp. 2,746,665 30,409,100.00 Wellington & Co., Inc. 299,652 29,965,200.00 Name No. of Shares Subscribed Amount Subscribed (P100.00 par value) and Paid Jjaccis Dev. Corp. 261,396 26,139,600.00 Warn Food Dev. Corp. 199,768 19,976,800.00 Web-Jet Inv. & Dev. Corp. 174,797 17,479,700.00 Teresita Ty 164,997 16,499,700.00 IEI Development Corp. 158,349 15,834,900.00 Alta-Beta Investment & 157,717 15,771,700.00 Trading Co., Inc. . Arfe Commercial Corp. 157,517 15,751,700.00 Welison D. Ty 129,850 12,985,000.00 William D. Ty 104,878 10,487,800.00 Arfe Holdings & Dev. Corp. 7,490 749,000.00 Lily T. Ang 7,292 729,200.00 Salustiana T. Tan 6,659 665,900.00 Leticia T. Dee 6,248 624,800.00 Washington D. Ty 4,994 499,400.00 Wilfrido D. Ty 555 55,500.00 Felicisima T. Sia 1 100.00 Treasury Shares 5,197,762 P519,776,200.00 50,695 5,069,500.00 Total 5,248,457 P524,845,700.00 ========= ============ The said property to be declared as dividend is no longer intended to be used by WIMC in its ordinary course of business and that the said property is recorded in the books of WIMC at its book value. IEaHSD In connection therewith, you now request for confirmation that: 1. The property to be declared as property dividend can be recorded at its book value in the books of WIMC, and WIMC's stockholders can record the dividends thus received at WIMC's book value. 2. The proposed property dividend which shall be received by the corporate stockholders of WIMC shall be subject to a final withholding tax of zero (0%) percent, whereas the individual stockholders shall be subject to 10% dividends tax and the receiving corporate stockholders shall not be subject to any income or capital gains tax arising from their receipt of the real estate property as property dividend. 3. WIMC shall not be subject to any Value Added Tax, income or capital gains tax on the said distribution of property dividends. 4. That the amount of the documentary stamp tax on the Deed of Conveyance to be executed between WIMC and the recipient stockholders covering the real estate property declared as property dividend shall be based on the book value of said real estate property at the rate of fifteen (P15.00) pesos for every one thousand pesos (P1,000.00) or a fractional part thereof, of the book value of the real property declared as dividends (Section 196, Tax Code, as amended). We reply, as follows: 1. The property dividend shall be recorded at book value in the books of both the issuing corporation and the recipient corporate stockholder. BIR Ruling No. 21 (c (2)-028-89-130-89), applying Sections 250 and 251 of Revenue Regulations No. 2, stating that dividends paid in securities or other property (other than its own stock) in which the earnings of a corporation have been invested are income to the recipients to the amount of the full market value of such property when received by individual stockholders has already been modified, having been rendered obsolete by Executive Order No. 37 (effective August 1, 1986), subjecting to income tax at 0% effective January 1, 1989, dividends received by a domestic corporation from another domestic corporation shall not be subject to tax under Section 27 (D) (4) of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337. (BIR Ruling No. 276-91, dated December 26, 1991) 2. We confirm your opinion that the declared property dividends which shall be received by the stockholders of WIMC shall be subject to a final withholding tax of zero (0%) percent, and the receiving corporate stockholders shall not be subject to any income or capital gains taxes arising from their receipt of these properties as property dividend (Section 27 (D) (4) of the Tax Code of 1997, as amended by R.A. No. 9337). However, certificates authorizing registration for real estate properties shall be secured from the Revenue District Officer of the Revenue District Office where the property declared as dividend is located. 3. We also confirm your opinion that WIMC shall not be subject to any income or capital gains tax on the difference between the fair market value and the book value of the property dividends. This is because there is no realized gain on the part of WIMC, considering the fact that the value used at the time of distribution is the book value. However, the distribution of said property dividend is subject to VAT being a transaction incidental to WIMC's main business and considering further that the property covered by Transfer Certificate of Title No. 169568 is used by WIMC in its ordinary course of business and rental income were derived therefrom. (Section 14 (B) (p) (1) of Revenue Regulations No. 4-2007) 4. Upon subsequent sale or other disposition of the property received as dividends by WIMC's stockholders, the tax base on the subsequent sale or other disposition shall also be its book value at the time of the dividend distribution. 5. The amount of the documentary stamp tax on the Deeds of Conveyance to be executed between WIMC and the recipient stockholders covering the real estate properties declared as property dividends shall be based on the book value of said real estate properties, . . ., at the rate of Fifteen pesos (P15.00) for every One thousand pesos (P1,000.00) or fractional part thereof, of the book value of the real properties declared as dividends (Section 196, Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337). The documentary stamp tax therein shall be due and payable within 10 days after the close of the month when the taxable document was made, signed, issued, accepted or transferred. (Section 200 (B) of the Tax Code of 1997, as amended). 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. HAICET Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service