Pelaez Gregorio Gregorio & Lim

October 10, 2008 BIR RULING [DA-(C-089) 284-08] Pelaez Gregorio Gregorio & Lim 6F Padilla Building, F. Ortigas Jr. Road Ortigas Center, Pasig City Attention: Atty. Vicente G. Gregorio Gentlemen : This refers to your letter dated September 29, 2008 stating that your client, Stella Sur Corporation (Stella Sur), is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with principal office address at 230 Batangas North, Ayala Alabang, Muntinlupa City; that it is engaged as a real estate lessor; that it has undeveloped real properties located at Barrio Tayud, Municipality of Consolacion, Province of Cebu and covered by TCT No. MR-2555 (T-63866) issued by the Registry of Deeds for Mandaue City; that the said properties are not used in business nor intended for sale or lease in the ordinary course of business nor 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 subject to depreciation; that the Board of Directors has approved a resolution that it is to the best interest of Stella Sur stockholders to sell the subject properties; and that in the said resolution, one of its Directors, Arch. Emmanuel A. Miana, was authorized to take all actions necessary to sell the above-mentioned properties and to sign all the documents required to effect the sale. DCISAE In connection therewith, you now request for confirmation of your opinion that the proposed sale of the above-mentioned properties are classified as capital assets subject to the six percent (6%) capital gains tax under Section 27 (D) (5) of the Tax Code of 1997 and to the corresponding documentary stamp tax under Section 196 of the said Code but that the proposed sale is not subject to the 12% value-added tax (VAT) and withholding tax. 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." SADECI Moreover, Section 3 (a) (3) of Revenue Regulations No. 7-2003 provides that all real properties of the real estate lessor, whether land/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. 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 12% VAT. (BIR Ruling No. DA152-04 dated March 31, 2004) Accordingly, we hereby confirm your opinion that the proposed sale of the above-mentioned properties which is 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, supra ; (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 Stella Sur's trade or business, as provided under Section 109 (w) of the Tax Code of 1997, as amended by Republic Act No. 9337, as implemented by Revenue Regulations No. 16-2005, as amended. (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. DCAEcS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service