World Trade Center Corporation

November 3, 2008 BIR RULING [DA-(C-116) 380-08] 27 (D) (5); RR7-2003; 196; DA 219-05; DA 201-06 World Trade Center Corporation 15th Floor, Philippine Axa Life Centre, Sen. Gil Puyat Avenue, Makati City Attention: Cesar I. Valenzuela President Gentlemen : This refers to your letter dated October 8, 2008 requesting confirmation of your opinion that the sale by a holding company of a real estate property not in the regular course of business is not subject to value-added tax. It is represented that the World Trade Center Corporation ("WTCC") is a holding company registered with the Securities and Exchange Commission (SEC) with principal office at 15th Floor, Philippine Axa Life Centre, Sen. Gil Puyat Avenue, Makati City; that it is the registered owner of two (2) vacant parcels of land known as lots 7 and 8 located at the EDSA Extension, Reclamation Area, Pasay City, with a total area of 28,216 square meters covered by Transfer Certificates of Title Nos. 142886 and 142887 of the Registry of Deeds of Pasay City (the "property"); that WTCC acquired the property on August 1990 for long-term investment purpose and not for development or sale to customers in the ordinary course of trade or business; that in the books of WTCC, the property is classified as a capital asset; moreover, the property is not under lease, has been vacant ever since its acquisition, and has no improvement or infrastructure of any kind. It is further represented that WTCC intends to sell the property to Metropolitan Bank & Trust Company ("Metrobank"); and that it is your opinion that since the proposed sale of the said property is not being made in the regular course of trade or business, it is not subject to value-added tax under Sec. 106 (A) (1) (a) of the 1997 National Internal Revenue Code (NIRC), as amended, but to capital gains tax (CGT) as set forth under Sec. 27 (D) (5) of the NIRC. In reply, please be informed that Sec. 27 (D) (5) of the 1997 NIRC, as amended, provides that a final tax of six percent (6%) is imposed on the gains 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 Sec. 6 (E) of the said Code, whichever is higher, of such lands and/or buildings. The term "capital asset" is negatively defined in Section 39 (A) (1) of the Tax Code, as ". . . property held by the taxpayer (whether or not connected with his trade of business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Sec. 34; or real property used in trade or business of the taxpayer." Thus, where the property has remained undeveloped, idle and vacant, does not form part of the inventory of the taxpayer for sale or lease to customers, not actually used in business, and is aptly recorded as investment property in the corporate books, this Office has consistently ruled that the same shall be considered as capital asset and the gain presumed to have been realized from its sale will be subject to the CGT when sold. (BIR Rulings DA-163-05 dated April 14, 2005, DA-040-03, DA-008-04 dated January 6, 2004, DA-152-04, DA-270-04 dated May 17, 2004, DA-155-05 dated April 14, 2005, DA-219-05 dated May 5, 2005) It is noted, however, that under Revenue Regulations (RR) No. 07-03, all real properties acquired by a taxpayer that is habitually engaged in the real estate business shall be considered ordinary assets. Sec. 2, pars. (d), (e) and (f) of RR No. 7-2003, defines the persons engaged in the real estate business, as follows: "d. Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full or part-time dealer in real estate. "e. Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sale or lease. "f. Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent." Based on the above definitions, WTCC is a company not habitually engaged in the real estate business. It is primarily organized to function as a holding company. Moreover, as you mentioned, the subject property has, from the time of its acquisition, remained idle, vacant and undeveloped, and was never used in the conduct of WTCC's business. In BIR Ruling DA-201-06 dated April 3, 2006, citing BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003, the BIR held thus: ". . . Considering that RS is not real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is to carry on its agricultural business, the parcels of land to be sold by RS are not stock in trade or other real property of a kind which would properly be included in RS' inventory if on hand at the close of the taxable year. Nor are they real property held primarily for sale or lease to customers in the ordinary course of trade or business." Furthermore, in BIR Ruling No. 014-03 dated October 28, 2003, it was ruled that for a property to be considered an ordinary asset, it must be actually used in the business of the corporation. The BIR stated that on the condition that the taxpayer concerned was not habitually engaged in the real estate business, the property not actually used in the business of the taxpayer, the same having remained idle and undeveloped, was considered a capital asset. In view of the foregoing, this Office confirms your opinion that the proposed sale by WTCC of the property is a sale of capital asset subject to the 6% CGT pursuant to Sec. 27 (D) (5) of the 1997 NIRC. Moreover, under Sec. 109 (p) of the 1997 NIRC, as amended, the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business shall be exempt from VAT. (BIR Ruling DA-201-06 dated April 3, 2006, DA-270-04 dated May 17, 2004, DA-008-04 dated January 6, 2004) Given your representation that the property is neither held by WTCC primarily for sale to customers nor for lease, the sale of said property shall not be subject to VAT. Finally, the proposed Deed of Sale to be executed between WTCC and Metrobank conveying the above-mentioned property shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6 (E) of the same Code, whichever is higher. 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