Bright Condo-Residence Corporation

December 19, 2008 BIR RULING [DA-(C-179) 555-08] DA 155-06 Bright Condo-Residence Corporation U201 SJB Centro Plaza 49 Scout Madrinan Street corner Scout Torillo Street South Triangle, Quezon City Attention: Mr. Francisco L. Tongson President Gentlemen : This refers to your letter dated October 15, 2008 stating that Bright Condo-Residences Corporation (Bright) develops and sells medium-cost condominiums; that at the start of each project, it buys land; that it transfers the ownership of this land to a condominium corporation; that being sole owner at that point, it initially hold all the shares of the corporation; that when the building is completed, it sells the developed units and the common areas within the building, pursuant to the provisions of Republic Act (R.A.) No. 4726; that it executes a Deed of Sale for the units and at that point, it also sells shares in the condominium corporation and accordingly execute a separate Deed of Sale for the shares; and that there are two (2) separate Deeds of Sale, each with its own distinct consideration or price. ETHCDS In connection therewith, you now request for the tax consequences on the following: 1. The sale of shares or membership certificates in the condominium corporation; and 2. The sale of the condominium units. In reply thereto, please be informed that reference is made to the pertinent provisions of the Tax Code of 1997, R.A. No. 4726, relevant rules and regulations, rulings and jurisprudence in addressing your concerns. R.A. No. 4726 Sec. 2. A Condominium is an interest in real property consisting of a separate interest in a unit in a residential, industrial or commercial building and an undivided interest in common, directly or indirectly, in the land on which it is located and in other common areas of the building. A condominium may include, in addition, a separate interest in other portions of such real property. Title to the common areas, including the land, or the appurtenant interests in such areas, may be held by a corporation specially formed for the purpose (hereinafter known as the 'condominium corporation') in which the holders of separate interest shall automatically be members or shareholders, to the exclusion of others, in proportion to the appurtenant interest of their respective units in the common areas. From the above provision, it is undisputed that there are two (2) modes of transfer. The first is by direct transfer of pro indiviso interest together with the sale of the unit, and the second is by transfer of shares or membership certificates in the condominium corporation to which the land has been previously transferred by the developer. Thus, instead of transferring the pro-indiviso interests directly to the buyers, the developer opts to transfer the land the common areas to a corporation and thereafter sells shares or membership certificates in the corporation. Tax Code Sec. 22 (L). The term 'shares of stock' shall include shares of stock of a corporation, warrants and/or option to purchase shares of stock, as well as units of participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as a corporations, associations, and recreation or amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates. CDTSEI In BIR Ruling No. 206-99 dated December 28, 1999, this Office ruled that ". . . membership certificate is in the nature of a series of stock as defined in Section 22(L) of the Tax Code of 1997, the original issuance thereof by Fantasy World Theme Parks, Amusement and Recreation Club, Inc. is subject to documentary stamp tax imposed under Section 175 of the said Code. The sale, however, is subject to documentary stamp tax of P1.50 on each P200, or fractional part thereof, of the par value of such membership certificate pursuant to Section 176 of the Tax Code of 1997." Section 27 (D) (2). Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: Not over P100,000 5% Amount in excess of P100,000 10% Inasmuch as the transfer of the membership certificates by Bright is not listed in the local stock exchange, the transfer thereof shall be subject to capital gains tax imposed under Section 27 (D) (2), supra, based on their book value nearest the valuation date pursuant to Section 6 (a) (3) of Revenue Regulations No. 2-82, as amended by Revenue Regulations No. 6-2008. R.A. No. 9243, as implemented by Revenue Regulations No. 13-2004 Sec. 3. Section 176 of the National Internal Revenue Code of 1997, as amended, is hereby renumbered as Section 175 and further amended as follows: "Sec. 175. Stamp Tax on Sales, Agreements to Sell, Memorandum of Sales, Deliveries or Transfer of Shares or 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: . . . ." Such being the case, the sale of membership certificates in the condominium corporation by Bright is subject to documentary stamp tax at the rate of P0.75 on each Two hundred pesos (P200), or fractional part thereof, of the par value of such certificate as prescribed in Section 3 of R.A. No. 9243. Revenue Regulations No. 6-2001, as amended Sec. 2.57.2(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of real property classified as ordinary asset. A creditable withholding tax based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the withholding agent/buyer, in accordance with the following schedule: xxx xxx xxx "(B) Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business: With a selling price of Five Hundred Thousand Pesos (P500,000) or less 1.5% With a selling price of more than Five Hundred Thousand Pesos (P500,000) but not more than Two Million Pesos (P2,000,000) 3.0% With a selling price of more than Two Million Pesos (P2,000,000) 5.0% The sale of condominium units by Bright which is habitually engaged in real estate, shall be subject to the creditable withholding tax at the rate of 3% based on the gross selling price or fair market value, whichever is higher. Moreover, the sale of the aforesaid condominium units shall be subject to value-added tax (VAT) and the corresponding documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended. acSECT R.A. No. 9337, as implemented by Revenue Regulations No. 16-2005, as amended Sec. 4. Section 106 of the same Code, as amended, is hereby further amended to read as follows : "Sec. 106. Value-added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) [now 12%] of the gross selling price or gross value in money of the goods or properties sold, bartered, or exchanged, such tax to be paid by the seller or transferor: The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: "a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; xxx xxx xxx Section 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, 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 this Code, whichever is higher: . . . WHEREFORE, premises considered, this Office holds that 1. The sale of shares or membership certificates in the condominium unit by Bright is subject to capital gains tax imposed under Section 27 (D) (2) based on their book value nearest the valuation date pursuant to Section 6 (a) (3) of Revenue Regulations No. 2-82, as amended by Revenue Regulations No. 6-2008 and to the corresponding documentary stamp tax prescribed in Section 3 of R.A. No. 9243. 2. The sale of the condominium units is subject to the creditable withholding tax at the rate of 3% based on the gross selling price or fair market value, whichever is higher, as prescribed in Revenue Regulations No. 6-2001, to the value-added tax under R.A. No. 9337 and to the corresponding documentary stamp tax imposed under Section 176 of the Tax Code of 1997, as amended. 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. AIHaCc Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service