Niyog Property Holdings, Inc.

November 3, 2008 BIR RULING [DA-(C-118) 385-08] Niyog Property Holdings, Inc. National Road, Talon, Las Pias City Attention: Ms. Ma. Celia H. Fernandez-Estavillo Corporate Secretary Gentlemen : This refers to your letter dated October 7, 2008 stating that the Niyog Property Holdings, Inc. (NPHI) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that its current capital structure is as follows: ScTIAH Name Nationality No. of Shares Amount Amount Paid Subscribed Subscribed Rizal Filipino 1,163,819 P116,381,900.00 P116,381,900.00 Commercial Banking Corporation RCBC Savings Filipino 835,426 83,542,600.00 83,542,600.00 Bank Cesar E.A. Filipino 1 100.00 100.00 Virata Rizalino S. Filipino 1 100.00 100.00 Navarro Lorenzo V. Filipino 1 100.00 100.00 Tan John Tomas G. Filipino 1 100.00 100.00 Deveras Ma. Teresita A. Filipino 1 100.00 100.00 Nunez _________ ______________ ______________ Total 1,999,250 P199,925,000.00 P199,925,000.00 ======== ============= ============= that in their Joint Special Meeting held on October 6, 2008, the Board of Directors and shareholders of NPHI authorized the decrease of NPHI's authorized capital stock from Two Hundred Million Pesos (P200,000,000.00) divided into Two Million (2,000,000) shares, with a par value of One Hundred Pesos (P100.00) per share, to One Hundred Thirty Nine Million One Hundred Sixty Nine Thousand Five Hundred Pesos (P139,169,500.00) divided into One Million Three Hundred Ninety One Thousand Six Hundred Ninety Five (1,391,695) shares, with a par value of One Hundred Pesos (P100.00) per share; that in order to decrease its authorized capital stock, NPHI shall redeem and cancel four hundred ninety four thousand six hundred thirty four (494,634) shares owned by RCBC and one hundred thirteen thousand six hundred seventy one (113,671) shares owned by RSB by declaring liquidating dividends in favor of the Transferees in the form of parcels of land located in Bacoor, Cavite now registered under the name of NPHI; and that the properties were previously subject of a tax-free exchange of property for shares of stock between the previous owners and NPHI. IcEACH In connection therewith, you now request confirmation of your opinion that 1. NPHI is not liable to income tax on its receipt of the surrendered shares; 2. The transfer of properties in favor of the Transferees will not subject NPHI to corporate income tax, capital gains tax and consequently to withholding tax; 3. The Deeds of Conveyance executed between NPHI and the Transferees are not subject to documentary stamp tax (DST) under Section 196 of the Tax Code of 1997; TDcAaH 4. Any gain realized or loss sustained by the Transferees shall be treated as capital gains or loss and shall be taxable income or deductible loss by the Transferees; the liquidating gain (if any) shall be measured by the difference between the fair market value of the properties received vis--vis the cost bases of the shares to the Transferees; and the gain realized, if any, is subject to the regular corporate income tax rates; and 5. The conveyance by NPHI of the parcels of land as liquidating dividends is not subject to value-added tax (VAT). In reply thereto, please be informed as follows: 1. NPHI is not liable to income tax on its receipt of the surrendered shares. This is so because the surrendered shares received by NPHI do not represent value since they are merely documentary evidence of the reduced capital stock and will cease to exist after redemption and cancellation. cHaADC This is fortified in BIR Ruling No. DA360-06 dated June 9, 2006, where this Office ruled that "A liquidating corporation is not subject to income tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial liquidation. In the instant case, THC merely performs the ministerial function of implementing the reduction of capital stock and therefore THC is not taking title to nor will it receive any value for the surrendered shares. The reduced shares of THC do not represent value since they are merely documentary evidence of the reduced capital stock and will cease to exist after their cancellation. From the foregoing, it can be said that a company under partial liquidation is not subject to income tax for receiving from its stockholders surrendered shares and for canceling the reduced shares." 2. The transfer of the parcels of land in favor of the Transferees is not considered a sale of these assets and, thus, NPHI does not realize gain or loss in its partial liquidation. Thus, in BIR Ruling No. DA048-07 dated January 31, 2007, this Office, ruled that ". . . the above transfer of properties in favor of its (the corporation's) 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 C od e of 1997, and consequently, to the withholding tax imposed under Revenue Re gulatio ns No. 2 -9 8, 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 partial or complete liquidation, and consequently, the liquidating corporation is not liable for income tax for said transaction." The rationale of the above-mentioned principle was enunciated in BIR Ruling No. 059-90 dated April 17, 1990, which held that "Moreover, Revenue Regulations No. 1-90 (now Revenue Re gulatio ns No. 2 -9 8) does not apply to transfers in complete liquidation where the assets of the liquidating corporation are transferred to its stockholders in exchange for the surrender of the latter's shares of stock for cancellation by the corporation. This conveyance is without any consideration. The transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation." 3. The Deeds of Conveyance executed between NPHI and the Transferees are not subject to DST imposed under Section 196 of the Tax Code of 1997. Section 196 of the Tax Code reads: "SEC. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property. On all conveyances, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed . . ." In the present case, the conveyance of the parcels of land by NPHI in favor of the Transferees is without valuable consideration but merely a return of capital. In BIR Ruling No. DA048-07 dated January 31, 2007, this Office ruled that "The distribution of 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 C od e 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 . . . ." Conversely, no DST is due on the surrender by the Transferees of their shares of stock in NPHI and the subsequent cancellation thereof. The Tax Code of 1997 imposes a DST on the sale, assignment or transfer of shares of stock under Section 175 thereof (as amended by Republic Act (RA) No. 9243 and renumbered by Revenue Regulations No. 13-2004. It provides that "SEC. 175. Stamp Tax on Sales, Agreements to Sell, Memorandum of Sales, Deliveries or Transfer of Shares of Certificates of Stock. On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of shares or certificates of stock in any association, company or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such stock, or to secure the future payment of money, or for the future transfer of any stock, there shall be collected a documentary stamp tax of Seventy-five centavos (P0.75) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such stock . . . ." In BIR Ruling No. DA360-06 dated June 9, 2006, this Office ruled that ". . . no DST under the above quoted provision shall be due on the surrender by the stockholder of the shares of stock to the liquidating company. The surrender of shares does not constitute a sale or assignment or transfer because the company is not taking title to the surrendered shares, and shares are retired and not retained as treasury shares. In effect, the company does not realize any benefit, as owner or otherwise, from its receipt of the shares." 4. Section 73 (A) of the Tax Code of 1997 provides that where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or deductible loss, as the case may be. The liquidating gain of the Transferees, if any, is the difference between the fair market value of the parcels of land received vis--vis the cost bases of the shares they will surrender to NHPI. Furthermore, the gain realized, if any, is subject to the regular corporate income tax of 35% under Section 27 of the Tax Code of 1997, as amended by R.A. No. 9337. In BIR Ruling No. DA360-06 dated June 9, 2006, this Office ruled that "Section 73(A) of the Tax C od e of 1997, provides in part, that 'where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or deductible loss, as the case may be.' Citing BIR Ruling No. 039-02 dated November 11, 2002, . . . the liquidating gain, i.e., the difference between the fair market value of the properties received vis--vis the cost basis of the shares to the stockholders, derived by an individual stockholder who is a citizen or a resident alien is subject to ordinary income tax rates prescribed under Section 24(A)(1) of the Tax C od e of 1997, as amended, or under Section 25(A)(1) and (b) thereof, in case of a non-resident alien individual. Applying the foregoing, the gain, if any, derived by Ayala Corporation shall be subject to the regular income tax imposed under Section 27 of the Tax Co d e of 1997." 5. The conveyance by NPHI of the parcels of land as liquidating dividends is not subject to VAT. The transfer of NPHI of the parcels of land to the Transferees is not made in the ordinary course of trade or business. NPHI is a holding company and from the time it was organized, was never engaged in real estate or in the sale of real property. Since the parcels of land transferred to the Transferees are not stock-in-trade of NPHI, the transfer of the property to the Transferees is not subject to VAT. To fortify the above-mentioned principle, this Office in BIR Ruling No. DA360-06 dated June 9, 2006, held "The conveyance by THC of its real properties as liquidating dividends to Ayala Corporation, in redemption of the latter's shares of stock in THC is not subject to 10% VAT imposed under Section 106(A) of the Tax C od e, as amended, since the transfer of said properties was not made in the ordinary course of its trade or business." ETaHCD The same conclusion was reached in BIR Ruling No. DA048-07 dated January 31, 2007, which ruled that "Finally, since TECHNO, from the time it was organized was never engaged in the sale of real properties, the transfer of the above-described property in the form of liquidating dividends to its sole stockholder is not subject to value-added tax prescribed in Section 106(B)(4) of the Tax C od e of 1997, as amended by RA No. 9 33 7, as implemented by Revenue Re gulatio ns No. 16 -2 005." WHEREFORE, in view of the foregoing, this Office hereby confirms your opinion that 1. NPHI is not liable for income tax on its receipt of the surrendered shares of the Transferees in NPHI and the subsequent cancellation thereof by NPHI since the same will be done to implement the decrease in capital stock of NPHI pursuant to a partial liquidation. Upon receipt of the surrendered shares, NPHI will not take title thereto nor receive any value for the surrendered shares. 2. NPHI is not subject to the corporate income tax under Section 27 (A) or to the capital gains tax imposed under Section 27 (D) (5) both of the Tax Code of 1997, and consequently to the withholding tax imposed by Revenue Regulations No. 2-98, as amended, on the conveyance of the parcels of land to the Transferees as liquidating dividends since the same is not considered a sale of real property. 3. The Deeds of Conveyance to be executed between NPHI and the Transferees whereby the parcels of land shall be distributed as liquidating dividends to the Transferees are not subject to the DST under Section 196 of the Tax Code of 1997, as amended, since the conveyance thereof is not considered a sale or disposition thereof and such conveyance is done without valuable consideration. 4. Any gain realized or loss sustained by the Transferees from their receipt of the liquidating dividends in the form of real property shall be treated as capital gain or loss and shall be taxable income or deductible loss by the Transferees. The liquidating gain (if any) shall be measured by the difference between the fair market value of the properties received vis--vis the cost basis of the shares of the Transferees. The gain to be derived, if any, by the Transferees shall be subject to the regular corporate income tax rate of thirty five percent (35%) imposed under Section 27 of the Tax Code of 1997, as amended. HSATIC 5. The conveyance by NPHI of the real properties as liquidating dividends to the Transferees in redemption of the latter's shares of stock in NPHI is not subject to the 12% VAT imposed under Section 106 (A) of the Tax Code of 1997, as amended, since the same is not done in the course of trade or business. 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. HEDSCc Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service