L Aldaba Cojuanco Development Corporation

December 18, 2008 BIR RULING [DA-(C-178) 554-08] RR 7-2003; 27 (D) (5); 109; 014-2003; DA-349-2008 L Aldaba Cojuanco Development Corporation No. 2302 Roxas Boulevard, Pasay City Attention: Mr. Alberto A. Lim President Gentlemen : This refers to your letter dated November 28, 2008 stating that L Aldaba Cojuanco Development Corporation ("LACDC") is the registered owner of two (2) adjoining parcels of land together with improvements thereon located in Roxas Boulevard, Pasay City covered by TCT Nos. 102021 and 102018 issued by the Register of Deeds of Pasay City and Tax Declaration Nos. B1-013-00478, which are classified as residential properties; and that the said properties remain undeveloped since time of acquisition, and are not held primarily for sale or lease, nor being used in the ordinary course of the trade and business of LACDC, that the subject properties were never subjected to depreciation and no income or revenue is derived by LACDC from the said properties. CASaEc Given the foregoing, you request confirmation that the sale of the aforesaid properties, is subject to capital gains tax at the rate of 6% on the gain presumed to have been realized from the sale or transfer pursuant to Section 27 (D) (5) of the Tax Code of 1997 and to the Documentary Stamp Tax at the rate of P15.00 for each P1,000.00 of the consideration or fair market value of the property whichever is higher pursuant to Section 196 of the same Code. However, the sale is not subject to the 12% VAT pursuant to Section 4.09-1 (p) of Revenue Regulations No. 16-2005 inasmuch as said properties are not held primarily for sale or lease to customers nor used in the ordinary course of their primary trade or business. 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 idle and undeveloped, 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." The phrase "taxpayers engaged in the real estate business" refers collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayers not engaged in the real estate business" shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of these Regulations. [Sec. 2 (g), Revenue Regulations No. 7-2003] HICEca Inasmuch as LACDC is not primarily engaged in real estate business, but is merely a holding company organized to acquire by purchase, lease, or otherwise, and to own, use hold for investment, or otherwise sell, convey, exchange, lease, mortgage, work, improve, develop, repair, maintain, operate, divide, and otherwise handle, deal in, and dispose of real and personal properties of every kind . . ." it is deemed not engaged in the real estate business. Consequently, the sale of the aforesaid property is deemed a sale of capital asset subject to the 6% final capital gains tax but not subject to the 12% VAT. Moreover, real property, which is undeveloped 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, as amended, 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 Nos. DA-152-04 dated March 31, 2004, DA-011-08 dated January 15, 2008 and DA-349-08 dated June 11, 2008) WHEREFORE, in view of the foregoing, this Office hereby confirms your opinion that the above-mentioned properties, classified as residential properties which remain undeveloped as of time of acquisition does not fall under any of the assets enumerated in Section 39 (A) (1) of the Tax Code of 1997 in relation to Section 3 (e) of Revenue Regulations No. 7-2003 and are thus considered as capital assets. The sale of said properties shall be subject to 1. Capital gains tax of 6% pursuant to Section 24 (D) (1) of the Tax Code of 1997 as amended; 2. Documentary stamp tax at the rate of P15.00 for each P1,000 or fractional part thereof in excess of P1,000, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196, supra ; 3. However, the sale is not subject to the 12% VAT pursuant to Section 4.09-1 (p) of Revenue Regulations No. 16-2005 inasmuch as said properties are not held primarily for sale or lease to customers nor used in the ordinary course of their primary trade or business. AScTaD 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