Penta Group Realty International, Inc.

September 9, 2009 BIR RULING [DA-(C-204) 516-09] Secs. 73 (A); 24 (D) (1); 196; 189; DA-051-08; DA-072-05 Penta Group Realty International, Inc. c/o 2F Ersan Bldg., No. 32 Quezon Avenue, Quezon City Attention: Mr. Jaime C. Fernandez Chairman Gentlemen : This refers to your letter dated December 3, 2007, received by this Office via 2nd Indorsement from Revenue Region 7, Quezon City, requesting confirmation of your opinion that real property transferred by a corporation to its stockholders in the form of liquidating dividends is not subject to corporate income tax, documentary stamp tax and value-added tax. CcHDaA It is represented that the Penta Group Realty International, Inc. is a corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. A199711052 dated June 27, 1997; that the primary purpose of the corporation is to acquire by purchase, lease, donation or otherwise, and to own, use, improve, develop and hold for investment or otherwise, real estate of all kinds, whether improve, manage or otherwise dispose of buildings, houses, apartments, and other structures of whatever kind, together with their appurtenances; that the corporation failed to start its operations due to the collapse of the real estate market; that per SEC Certification, the corporation's SEC registration was revoked on February 10, 2004 for failure to submit financial statements and other legal requirements 5 years after registration; that the corporation is a registered owner of two (2) parcels of land covered by TCT No. 178127 (Lot 3-B with an area of 717 sq. m. and Lot 3-E, 17 sq. m.) located in Campanilla St., cor. E. Rodriguez Ave., Quezon City; that according to its Articles of Incorporation, the following have subscribed shares of stock: Name No. of Shares Amount Amount Subscribed Subscribed Paid-Up OmniCare 7,199 P7,199,000.00 P7,199,000.00 Country Bankers 5,699 5,699,000.00 2,699,000.00 Beneficial Life 5,699 5,699,000.00 2,699,000.00 Phil-Inter Life 5,699 5,699,000.00 2,699,000.00 Phil. Prudential 5,699 5,699,000.00 2,699,000.00 Ma. Salva R. Limbo 1 1,000.00 1,000.00 Rodolfo O. Desiderio 1 1,000.00 1,000.00 Jaime C. Fernandez 1 1,000.00 1,000.00 Jose C. Lee 1 1,000.00 1,000.00 Daniel M. Mercado, Jr. 1 1,000.00 1,000.00 TOTAL 30,000 P30,000,000.00 18,000,000.00 ===== ============ =========== that the corporation has returned the investment of Omnicare; and that the corporation now desires to distribute its real properties covered by TCT No. 178127 to its stockholders as liquidating dividends in the course of winding up its affairs. cSDIHT In reply, please be informed as follows: Corporate Income Tax The transfer by the liquidating corporation of its remaining assets to its stockholders in exchange for the surrender and cancellation of the shares is not a sale, hence the same is exempt from corporate income taxes, creditable withholding and documentary stamp taxes under Revenue Regulations No. 1-90, as amended by RR 6-2001 and further amended by RR 17-2003. (BIR Ruling Nos. 059-90 dated April 17, 1990 and 092-99 dated July 8, 1999) Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. (W.P. Fox & Sons, Inc., Petitioner vs. Commissioner of Internal Revenue, Respondent, 15 BTA 115; Jordan Petroleum Company, 13AFTR 2d 1692 (227 F. Supp. 174); JTS Brown & Son Company vs. Commissioner of Internal Revenue, 10TC 840) Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial redemption. (BIR Ruling No. 171-92 dated May 28, 1992) (BIR Ruling No. DA-(C-006) 028-08 dated July 11, 2008) However, the second paragraph of Section 73 (A) of the Tax Code of 1997 states: "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 a deductible loss, as the case may be." Thus, in the event that the liquidating dividend in the form of properties is more than the amount/value of investment, the gain realized by a stockholder from the distribution of the assets in liquidation is subject to the normal tax in like manner as if he had sold his stock to third persons. (Wise & Co. vs. Bibiano L. Meer, 078 Phil. 655, dated June 30, 1947) Nonetheless, this Office has held that the liquidating gain, which is the difference between the adjusted cost of the shares and the fair market value of the properties given as liquidating dividend is subject to the ordinary income tax rates and not to the capital gains tax on the sale of shares. (BIR Ruling No. 270-91 dated December 23, 1991) (BIR Ruling No. DA-051-08 dated January 30, 2008) Documentary Stamp Tax Section 189 of Revenue Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations provides, viz. : "Section 189. Conveyances by corporation to owner of all the capital. A conveyance of real estate by a corporation without valuable consideration to an owner of all its capital stock in consequence of its dissolution is not subject to tax." Pursuant to the abovequoted Section 189, the distribution of the assets of the corporation to its stockholders in liquidation of the business without consideration is viewed as a return of capital to the shareholders. Considering this, the provision of Section 196 of the Tax Code 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. Accordingly, the transfer by Penta Group Realty International, Inc. of its properties to the stockholders, in proportion to their respective shareholdings, shall not be subject to DST imposed under said Section 196 of the Tax Code, as amended. The notarial certification on the deed of assignment is, however, subject to the documentary stamp tax of P15.00 imposed under Section 188 of the same Tax Code. (BIR Ruling No. 059-90 dated April 17, 1990; BIR Ruling No. DA-072-05 dated March 3, 2005; BIR Ruling No. DA-051-08 dated January 30, 2008) CaEIST Value-Added Tax Since the conveyance by Penta Group Realty International, Inc. of its real properties as liquidating dividends to its stockholders is without valuable consideration and was not made in the course of trade or business, the same is not subject to the 12% VAT under Section 106 (A) of the Tax Code of 1997. (BIR Ruling No. DA-(C-006) 028-08 dated July 11, 2008) Finally, the stockholders who sell the real property received by them as liquidating dividends immediately after title thereto is transferred to their name are subject to the final capital gains tax imposed under Section 24 (D) (1) of the Tax Code, as amended, in the case of individual distributees and Section 27 (D) (5) thereof, in the case of corporate distributees. It bears emphasis, however, that prior to dissolution, the Bureau must investigate and determine that Penta Group Realty International, Inc. has no outstanding tax obligation, and if it has, the same must be settled fully before it can dissolve and distribute its remaining assets to its stockholders. This ruling is issued on the basis of the foregoing representations. 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