Bernaldo Directo & Po

July 10, 2009 BIR RULING [DA-(C-122) 360-09] Sec. 27 (D) (5); 39 (A); RR 7-2003; UN-276-95; 660-99; DA-397-2000; DA-219-05; DA-654-06 Bernaldo Directo & Po Unit 1807 Cityland Condominium 10 Tower 1 6815 Ayala Avenue cor. H.V. dela Costa Street Makati City Attention: Atty. Pepito G. Po Partner Gentlemen : This refers to your letter requesting confirmation of the tax consequence on the intended sale of real properties by Arayat Properties, Inc., Cabalen Realty Corporation, Candaba Realty Corporation, and Mayen Development Corporation to Balacat Realty Corporation. The facts, as represented, are as follows: Arayat Properties, Inc. is a domestic corporation duly organized and existing under the laws of the Philippines, with business address at Ace Bldg., 101 Rada St., Legaspi Village, Makati City. The company was incorporated on June 24, 1994, under Securities and Exchange Commission (SEC) Certificate of Registration No. AS94005646. Cabalen Realty Corporation is a domestic corporation duly organized and existing under the laws of the Philippines, with business address at San Fernando, Pampanga. The company was incorporated on July 19, 1995, under SEC Certificate of Registration No. AS95006923. Candaba Realty Corporation is a domestic corporation duly organized and existing under the laws of the Philippines, with business address at San Fernando, Pampanga. The company was incorporated on July 26, 1994, under SEC Certificate of Registration No. AS94006693. Mayen Development Corporation is a domestic corporation duly organized and existing under the laws of the Philippines, with business address at Mabalacat, Pampanga. The company was incorporated on October 18, 1989, under SEC Certificate of Registration No. 0000169617. The above-mentioned companies (collectively referred to as the "Transferors") have not commenced any commercial operation except for the single transaction of acquiring real properties located at the Province of Pampanga, as follows: DcSEHT A. Real Properties owned by Arayat Properties, Inc. Transfer Certificate of Title (TCT) Nos. 391636-R and 391637-R, both of the Registry of Deeds of the Province of Pampanga, located in Magngalit, Mabalacat, Pampanga. B. Real Properties owned by Candaba Realty Corporation TCT Nos. 473855-R, 386926-R, 430287-R and 393624-R, all of the Registry of Deeds of the Province of Pampanga, located in Sto. Rosario, Magalang, Pampanga. TCT Nos. 392916-R, 386921-R and 386922-R, all of the Registry of Deeds of the Province of Pampanga, located in Bundagul, Mabalacat, Pampanga. TCT No. 377436-R, of the Registry of Deeds of the Province of Pampanga, located in Sta. Maria, Mabalacat, Pampanga. C. Real Properties owned by Mayen Development Corporation TCT Nos. 400083-R and 402856-R, both of the Registry of Deeds of the Province of Pampanga, located in the Municipality of Magalang, Pampanga. D. Real Properties owned by Cabalen Realty Corporation TCT No. 392918-R, of the Registry of Deeds of the Province of Pampanga, located in Bundagul, Magalang, Pampanga. At present, there are no improvements on the above-mentioned real properties and that the same remain idle and unproductive. On the other hand, Balacat Realty Corporation is a domestic corporation duly organized and existing under the laws of the Philippines, with business address at TECO Ecozone, Mabalacat, Pampanga. The company was incorporated on July 15, 2008, under SEC Certificate of Registration No. CS200811030. It is your view, that the above real properties owned by the transferors should be classified as capital assets and the sale thereof subject to the 6% capital gains tax, based on the following grounds, to wit: 1) the transferors held the above properties primarily as investment per entry in their respective financial statements; and 2) the subject properties have been idle and unproductive since the time acquired by the transferors. From the foregoing, it is your view that the sale by the transferors of the above-mentioned real properties classified as capital assets, is subject to the 6% capital gains tax and the 1.5% documentary stamp tax only. As such, said sale is not subject to the value-added tax (VAT) imposed under Section 106 of the Tax Code of 1997, as amended, and as implemented by Revenue Regulations (RR) No. 16-2005, as amended by RR No. 4-2007. HaAISC In reply, please be informed that the term "capital assets" as negatively defined in Section 39 (A) (1) of the Tax Code of 1997, means property held by the taxpayer (whether or not connected with his trade or 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 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 allowances for depreciation provided in Subsection (F) of Section 34, or real property used in trade or business of the taxpayer. In view of the foregoing, and inasmuch as the aforementioned parcels of land of Arayat Properties, Inc., Cabalen Realty Corporation, Candaba Realty Corporation, and Mayen Development Corporation, were never used in business and neither were offered for lease to third party, the said idle and undeveloped realties, accordingly, are considered as capital assets. Consequently, the sale of said parcels of land is subject to the 6% capital gains tax under Section 27 (D) (5) of the Tax Code of 1997, as amended. Likewise, the said sale is subject to the documentary stamp tax imposed under Section 196 of the same Tax Code. (BIR Ruling No. 660-99 dated November 29, 1999; BIR Ruling No. DA-397-2000 dated November 20, 2000 citing UN-276-95 dated July 26, 1995; Rev. Regs. No. 7-2003) Moreover, the sale of the above real properties by Arayat Properties, Inc., Cabalen Realty Corporation, Candaba Realty Corporation, and Mayen Development Corporation, treated as their capital assets, is not subject to the 12% value-added tax imposed under Section 106 of the 1997 Tax Code, as amended, in accordance with Sec. 4.109-1 (B) (p) of Revenue Regulations (RR) No. 16-2005, as amended by RR 4-2007, implementing Republic Act No. 9337. (BIR Ruling No. DA-219-2005 dated May 5, 2005 cited in BIR Ruling Nos. DA-653 & 654-2006, both dated November 7, 2006) 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