La Fuerza, Inc.

September 17, 2009 BIR RULING [DA-(C-213) 551-09] 27 (D) (5); 39 (A) (1); 109 (P); RR 7-2003; RR 16-2005; DA-301-2004; DA-163-2005; DA-014-2003; VAT Ruling No. 034-2001; DA(C-141)399-09 La Fuerza, Inc. No. 2241, Pasong Tamo-Chino Roces Ave. Makati City Attention: Ms. Josephine Chang Gentlemen : This refers to your letter dated July 27, 2009 requesting for confirmation of your opinion that the sale of three (3) parcels of land with improvements by La Fuerza, Inc. is subject to the 6% capital gains tax ("CGT") and documentary stamp tax of 1.5% and not to the creditable withholding tax and value-added tax (VAT). IEHScT Based on your representations, as well as from the documents submitted, the facts are as follows: La Fuerza, Inc. is a corporation duly registered with the Securities and Exchange Commission with Company Registration No. 13511 dated February 5, 2008. Its primary purpose is "To manufacture, sell, deal in, and to engage in conduct and carry on the business of manufacturing, selling and dealing in wines, liquors and other allied products and cosmetic products of various brands". As such, La Fuerza, Inc. is not engaged in the real estate business. La Fuerza, Inc. is the registered owner three (3) parcels of land with improvements situated in the City of Davao, Island of Mindanao, Lot No. 11-A-1, (LRC) Psd-97638 covered by Transfer Certificate of Title (TCT) No. T-24988 with an area of 91,153 square meters; 1, (LRC) Pcs-20374 covered by Transfer Certificate of Title (TCT) No. T-50633 with an area of 8,847 square meters; 2, (LRC) Pcs-20374 covered by Transfer Certificate of Title No. T-50634 with an area of 9,098 square meters ("Subject Properties"). The Subject Properties were never used by La Fuerza, Inc. in its trade or business nor held primarily for sale or lease to customers in the ordinary course of its business. La Fuerza, Inc. is now intending to sell the said Subject Properties. In reply, please be informed that the term "capital asset" as negatively defined in Section 39 (A) (1) of the 1997 Tax Code, as amended, 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 of the taxpayer 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 allowance for depreciation provided in Subsection (F) of Section 34, or real property used in trade or business of the taxpayer. Furthermore, Section 3 (4) of Revenue Regulations (RR) No. 7-2003 provides that all real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real estate shall be considered as ordinary assets. As defined under Section 2 (g) of RR 7-2003, taxpayers engaged in the real estate business shall refer collectively to 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 the regulations. Considering that La Fuerza, Inc. is not a real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is to manufacture, sell, deal in, and to engage in conduct and carry on the business of manufacturing, selling and dealing in wines, liquors and other allied products and cosmetic products of various brands. As such, La Fuerza, Inc. is not engaged in the real estate business. Further, the aforesaid Subject Properties are not used by La Fuerza, Inc. in its trade or business nor held primarily for sale or lease to customers in the ordinary course of trade or business. (BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003) . Furthermore, in BIR Ruling No. 014-2003, dated October 28, 2003, it was ruled that for a property to be considered an ordinary asset, it must be actually used in the business of the corporation. It was likewise stated that on the condition that the taxpayer concerned was not habitually engaged in the real estate business, the property not actually used in the business of the taxpayer, was considered a capital asset. In view of the foregoing, it is the considered opinion of this Office that the income to be derived by La Fuerza, Inc. from the sale of the Subject Properties is not subject to the creditable/expanded withholding tax under Section 2.57.2 (J) of RR 2-98, as amended, but to the capital gains tax of six percent (6%) based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the Tax Code of 1997, as amended by Republic Act (RA) No. 9337, whichever is higher, of such property pursuant to Section 27 (D) (5) of the same Code. Moreover, under Section 109 (P) of the Tax Code, as amended by RA 9337, the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business shall be exempt from VAT. Considering that La Fuerza, Inc. is primarily engaged in the conduct and carrying on the business of manufacturing, selling and dealing in wines, liquors and other allied products and cosmetic products of various brands, the Subject Properties are not being held by La Fuerza, Inc. primarily for sale to customers or held for lease in the ordinary course of trade or business. Hence, the sale by La Fuerza, Inc. of the Subject Properties shall be exempt from VAT. (BIR Ruling Nos. DA-130-A-2003 dated April 25, 2003 and VAT Ruling No. 034-2001 dated June 13, 2001) . DHACES Finally, the Deed of Sale conveying the above-mentioned Subject Properties shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, 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 the same Code, whichever is higher. This ruling shall serve as the authority for the Revenue District Officer concerned to issue the corresponding Certificate Authorizing Registration and/or tax clearance certificate for the transfer of the title covering the parcels of land in the name of the buyer. 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