Buen Realty & Development Corporation

October 29, 2009 BIR RULING [DA-(C-247) 633-09] 27 (D) (5); 39 (A); 106; 197-2007; DA-692-2006; DA-155-05; DA-653 & 654-2006; DA (C-40) 541-2003 Buen Realty & Development Corporation No. 67 Federico Street, San Rafael Navotas, Metro Manila Attention: Ms. Nancy Sy Corporate Secretary Gentlemen : This refers to your letter dated September 1, 2009 requesting for confirmation of your opinion that the intended sale of real properties by Buen Realty & Development Corporation ("BRDC") to third party is subject only to capital gains and documentary stamps taxes. cCSEaA The facts as represented are as follows: BRDC is a domestic corporation duly organized and existing under the laws of the Philippines with Securities and Exchange Commission (SEC) Certificate of Registration No. 142175 dated July 6, 1987. BRDC has not commenced any commercial operation except for acquiring the following real properties, as follows: a. TCT No. 144730, of the Registry of Deeds of Quezon City, located at Corinthian Village, Quezon City, with improvements. b. TCT No. 2490, of the Registry of Deeds of Mandaluyong City, located at Connecticut, Greenhills Subd., Mandaluyong City, with no improvements. c. TCT No. 130171, of the Registry of Deeds of Quezon City, located at Fairview, Quezon City, with no improvements. The above properties, except for the property in Corinthian where it is being used sometime as rest house by the stockholders/owners of BRDC, have no existing improvements and that the same remain idle and unproductive. The Corinthian property, although it has existing improvements, has never generated any income nor does BRDC subjected the same to depreciation for purposes of deduction as it has never offered the same for lease nor consider the same as part of its inventory as BRDC has not commenced its realty business from the time of its inception. Furthermore, since BRDC has not commenced its realty business, its registration has been revoked by the SEC. BRDC has no intention of reviving the same. From the foregoing, you are requesting confirmation of your opinion that the above-mentioned real properties are considered as capital assets of BRDC, and that the subsequent sale thereof is subject to 6% capital gains tax and 1.5% documentary stamp tax. In reply, please be informed that Section 27 (D) (5) of the 1997 Tax Code, as amended, provides, viz. : "Sec. 27. Rates of Income Tax on Domestic Corporation. 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." AEIHaS On the other hand, Sec. 39 (A) (1) of the same Code provides: " Capital Assets. The term "capital assets" 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 be properly 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." In the instant case, the aforementioned real properties of BRDC are properly classified as capital assets because BRDC holds such properties as investment. BRDC never used said realties in business, hence, the above-mentioned properties were never subjected to depreciation, nor did they form part of BRDC's inventory as BRDC never engages in the real estate business. The Corinthian property, although it has an existing improvement, is only used as a rest house by the BRDC's stockholders/owners thereby it has never generated any income nor does BRDC subjected the same to depreciation for purposes of deduction as it has not commenced its realty business from the time of its inception. Accordingly, the intended sale of said real properties by BRDC shall be subject only to the capital gains tax imposed under Section 27 (D) (5) of the 1997 Tax Code, as amended, and to the documentary stamp tax imposed under Section 196 thereof. (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; BIR Ruling No. DA-219-2005 dated May 5, 2005 cited in BIR Ruling Nos. DA-653 & 654-2006, both dated November 7, 2006; Rev. Regs. No. 7-2003) Moreover, the sale of the above-mentioned real properties of BRDC, treated as capital assets, is not subject to the 12% value-added tax (VAT) 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 No. 4-2007, implementing Republic Act No. 9337. [BIR Ruling No. DA (C-40) 541-2009 dated September 15, 2009] 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