Palcon Realty Corporation

June 17, 2009 BIR RULING [DA-(C-093) 302-09] Secs. 24; 25; 27; 28; 176; 196; BIR Ruling 039-02 Palcon Realty Corporation Suite 304 ITC Building Sen. Gil Puyat Ave. Makati City Attention: Luis Ma. Jose G. Sison Corporate Secretary Gentlemen : This refers to your letter dated May 8, 2009 requesting a ruling on the tax implications of the transfer of real property by PALCON REALTY CORPORATION to its stockholders in the form of liquidating dividends. DaTICE It is represented that Palcon Realty Corporation ("Palcon," for brevity) is a corporation duly organized and existing under and by virtue of Philippines laws, authorized to engage in the real estate business, with principal office located at Suite 304 ITC Building, Sen. Gil Puyat Ave., Makati City. It is the absolute and registered owner of a parcel of land, together with its improvement, covered by TCT No. 66064, and two condominium units covered by CCT No. 2391 and CCT 10884 (collectively the "subject property") located at Pasig City, Baguio City and Makati City, respectively. Due to the demise of the majority stockholder of Palcon, the remaining stockholders approved to dissolve the corporation by formally terminating its corporate life on May 30, 2009 in a Special Stockholders Meeting held on April 15, 2009. Palcon will now distribute the subject property to its stockholders in the form of liquidating dividends as it winds up its affairs. In reply, please be informed that the transfer of the subject property in favor of the stockholders of Palcon 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) both 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 stockholders 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. 039-02 dated November 11, 2002 cited in BIR Ruling No. DA-174-03 dated June 3, 2003) Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial redemption. (BIR Ruling No. 171-92 dated May 28, 1992) On the other hand, shareholders of the corporation may realize gain or loss on their receipt of liquidating dividends from the dissolving corporation. The gain or loss is measured by the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shareholdings in the said corporation. TAIaHE Accordingly, Palcon is not liable for income tax on either the transfer of its assets to its stockholders or on its receipt of the shares surrendered by the shareholder. (BIR Ruling No. 039-02 dated November 11, 2002) Neither would the conveyance by Palcon of its real properties to its stockholders to the extent that such transfer represents the return of the stockholders' investments in the said corporation, be subject to any income tax and consequently, to the creditable withholding tax of 6% imposed under Section 3 (J) of Revenue Regulations No. 6-2001, as amended by Revenue Regulations No. 12-2001, implementing Section 57 (B) of the Tax Code of 1997. Such transfer is not considered a sale of its assets. Hence, Palcon, as the liquidating corporation, and the shareholders do not realize gain or loss as the case may be, in complete liquidation to the extent that the conveyance is without any consideration, but a return of shareholders capital which is not subject to tax. Moreover, since the transfer of the said properties to the stockholders as liquidating dividends is not made in the course of trade or business, the same is not subject to 12% VAT under Section 106 (A) of the 1997 Tax Code. 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 documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended. The distribution of the assets of the corporation to its stockholders in liquidation of the business without consideration is viewed as a return of capital to the shareholders. 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 shareholders as liquidating dividends is not deemed to be selling such assets to the latter. Accordingly, the transfer by Palcon of the subject 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, as amended. The notarial certification on the deed of assignment is, however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Tax Code. Finally, the stockholders who sell the real property received by them as liquidating dividends which are capital assets immediately after title thereto is transferred to their name are subject to the final capital gains tax imposed under Section 24 (D) (1) of the Tax Code, as amended, in the case of individual distributees and Section 27 (D) (5) thereof, in the case of corporate distributees. HAEDCT It bears emphasis, however, that prior to dissolution, the Bureau must investigate and determine that Palcon has no outstanding tax obligation, and if it has, the same must be settled fully before it can dissolve and distribute its remaining assets to its stockholders. 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