Ms. Fay Arianne T. Wang

December 8, 2009 BIR RULING [DA-(C-305) 754-09] DA360-06; DA048-07; 059-90; DA(C-118) 385-08 Ms. Fay Arianne T. Wang 168 New Manila Quezon City Madam : This refers to your letter dated October 2, 2009 stating that Masaito Development Corporation (MDC) currently has the following capital structure: Name No. of Shares Amount Subscribed Amount Paid-up Joseph C. Wang 32,385 P16,192,500.00 P16,192,500.00 Rosie T. Wang 28,135 14,067,500.00 14,067,500.00 John Philip T. Wang 4,420 2,210,000.00 2,210,000.00 Noelle Stephanie T. Wang 1,190 595,000.00 595,000.00 Fay Arianne T. Wang 1,870 935,000.00 935,000.00 Total 68,000 P34,000,000.00 P34,000,000.00 ===== ============ ============ that in their Joint Special Meeting held on December 8, 2003, the Board of Directors and shareholders of MDC authorized the decrease of MDC's authorized capital stock from One Hundred Million Pesos (P100,000,000.00) divided into Two Hundred Thousand (200,000) shares with a par value of Five Hundred Pesos (P500.00) per share, to Fifty Million Pesos (P50,000,000.00) divided into One Hundred Thousand (100,000) shares with a par value of Five Hundred Pesos (P500.00) per share; and that in order to decrease its authorized capital stock, MDC shall redeem and cancel 28,135 shares owned by Rosie T. Wang (Transferee) by declaring liquidating dividends in favour of the Transferee in the form of a parcel of land located in Mabiga, Mabalacat, Pampanga, covered by TCT No. 430847-R. Based on the foregoing representations, you now request confirmation of your opinion that 1. MDC is not liable for income tax on its receipt of the surrendered shares of the Transferee in MDC and the subsequent cancellation thereof by MDC since the same will be done to implement the decrease in capital stock of MDC pursuant to a partial liquidation. Upon receipt of the surrendered shares, MDC will not take title thereto nor receive any value for the surrendered shares. 2. MDC is not subject to the corporate income tax under Section 27 (A) or to the capital gains tax imposed under Section 27 (D) (5) both of the Tax Code of 1997, and consequently to the withholding tax imposed by Revenue Regulations No. 2-98, as amended, on the conveyance of the parcel of land to the Transferee as liquidating dividends since the same is not considered a sale of real property. 3. The Deed of Conveyance to be executed by and between MDC and the Transferee whereby the parcel of land shall be distributed as liquidating dividends to the Transferee is not subject to the Documentary Stamp Tax (DST) under Section 196 of the Tax Code of 1997, as amended, since the conveyance thereof is not considered a sale or disposition thereof and such conveyance is done without valuable consideration. cSTHAC 4. Any gain realized or loss sustained by the Transferee from the receipt of the liquidating dividends in the form of real property shall be treated as capital gain or loss and shall be taxable income or deductible loss by the Transferee. The liquidating gain (if any) shall be measured by the difference between the fair market value of the property received vis-a-vis the cost basis of the shares to the Transferee. The gain to be derived, if any, by the Transferee shall be subject to the regular individual income tax rate imposed under Section 24 of the Tax Code of 1997, as amended. 5. The conveyance by MDC of the property as liquidating dividends to the Transferee in redemption of the latter's shares of stock in MDC is not subject to twelve percent (12%) VAT imposed under Section 106 (A) of the Tax Code of 1997, as amended, since the same is not done in the course of trade or business. In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. MDC is not liable to income tax on its receipt of the surrendered shares. This is so because the surrendered shares received by MDC do not represent value since they are merely documentary evidence of the reduced capital stock and will cease to exist after redemption and cancellation. This is fortified in BIR Ruling No. DA360-06 dated June 9, 2006, where this Office ruled that "A liquidating corporation is not subject to income tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial liquidation. In the instant case, THC merely performs the ministerial function of implementing the reduction of capital stock and therefore THC is not taking title to nor will it receive any value for the surrendered shares. The reduced shares of THC do not represent value since they are merely documentary evidence of the reduced capital stock and will cease to exist after their cancellation. From the foregoing, it can be said that a company under partial liquidation is not subject to income tax for receiving from its stockholders surrendered shares and for cancelling the reduced shares." DTAESI 2. The transfer of the parcel of land in favour of the Transferee is not considered a sale of these assets and, thus, MDC does not realize gain or loss in its partial liquidation. Thus, in BIR Ruling No. DA048-07 dated January 31, 2007, this Office ruled that ". . . the above transfer of properties in favour of its (the corporation's) sole stockholder as liquidating dividends is not subject to the corporate income tax imposed under Section 27(A) or to the capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997, and consequently, to the withholding tax imposed under Revenue Regulations No. 2-98, as amended. The transfer by the liquidating corporation of its assets to its stockholder is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation, and consequently, the liquidating corporation is not liable for income tax for said transaction." The rationale of the above-mentioned principle was enunciated in BIR Ruling No. 059-90 dated April 17, 1990, which held that "Moreover, Revenue Regulations No. 1-90 (now Revenue Regulations No. 2-98) does not apply to transfers in complete liquidation where the assets of the liquidating corporation are transferred to its stockholders in exchange for the surrender of the latter's shares of stock for cancellation by the corporation. This conveyance is without any consideration. The transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation." 3. The Deed of Conveyance executed between MDC and the Transferee is not subject to DST imposed under Section 196 of the Tax Code of 1997. Section 196 of the Tax Code reads: "SEC. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property. On all conveyances, deeds, instruments, or writings, other than grants, patents 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 . . ." ACcEHI In the present case, the conveyance of the parcel of land by MDC in favour of the Transferee is without valuable consideration but merely a return of capital. In BIR Ruling No. DA048-07 dated January 31, 2007, this Office ruled that "The distribution of assets of the corporation to its stockholder in liquidation of the business without consideration is viewed as a return of capital to the shareholder. 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 . . . ." Conversely, no DST is due on the surrender by the Transferee of her shares of stock in MDC and the subsequent cancellation thereof. The Tax Code of 1997 imposes a DST on the sale, assignment or transfer of shares of stock under Section 175 thereof (as amended by Republic Act (RA) No. 9243 and renumbered by Revenue Regulations No. 13-2004. It provides that "SEC. 175. Stamp Tax on Sales, Agreements to Sell, Memorandum of Sales, Deliveries or Transfer of Shares of 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 of 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 . . . ." In BIR Ruling No. DA360-06 dated June 9, 2006, this Office ruled that ". . . no DST under the above quoted provision shall be due on the surrender by the stockholder of the shares of stock to the liquidating company. The surrender of shares does not constitute a sale or assignment or transfer because the company is not taking title to the surrendered shares, and shares are retired and not retained as treasury shares. In effect, the company does not realize any benefit, as owner or otherwise, from its receipt of the shares." HSAcaE 4. Section 73 (A) of the Tax Code of 1997 provides that where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholders, whether individual or corporate, is a taxable income or deductible loss, as the case may be. The liquidating gain of the Transferee, if any, is the difference between the fair market value of the parcel of land received vis-a-vis the cost bases of the shares they will surrender to MDC. Furthermore, the gain realized, if any, is subject to the regular individual income tax rate of 32% under Section 24 of the Tax Code of 1997, as amended. In BIR Ruling No. DA360-06 dated June 9, 2006, this Office ruled that "Section 73 (A) of the Tax Code of 1997, provides in part, that '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 deductible loss, as the case may be.' Citing BIR Ruling No. 039-02 dated November 11, 2002, . . . the liquidating gain, i.e., the difference between the fair market value of the properties received vis-a-vis the cost basis of the shares to the stockholders, derived by an individual stockholder who is a citizen or a resident alien is subject to ordinary income tax rates prescribed under Section 24(A)(1) of the Tax Code of 1997, as amended, or under Section 25(A)(1) and (b) thereof, in case of a non-resident alien individual. Applying the foregoing, the gain, if any, derived by Ayala Corporation shall be subject to the regular income tax imposed under Section 27 of the Tax Code of 1997." 5. The conveyance by MDC of the parcel of land as liquidating dividends is not subject to VAT. The transfer of MDC of the parcel of land to the Transferee is not made in the ordinary course of trade or business. Since the parcel of land transferred to the Transferee is not stock-in-trade of MDC, the transfer of the property to the Transferee is not subject to VAT. To fortify the above-mentioned principle, this Office in BIR Ruling No. DA360-06 dated June 9, 2006, held that CEIHcT "The conveyance by THC of its real properties as liquidating dividends to Ayala Corporation, in redemption of the latter's shares of stock in THC is not subject to 10% VAT imposed under Section 106(A) of the Tax Code, as amended, since the transfer of said properties was not made in the ordinary course of its trade or business." The same conclusion was reached in BIR Ruling No. DA048-07 dated January 31, 2007, which ruled that "Finally, since TECHNO, from the time it was organized was never engaged in the sale of real properties, the transfer of the above-described property in the form of liquidating dividends to its sole stockholder is not subject to value-added tax prescribed in Section 106(B)(4) of the Tax Code of 1997, as amended by RA No. 9337, as implemented by Revenue Regulations No. 16-2005." WHEREFORE, in view of the foregoing , this Office hereby confirmed your opinion that 1. MDC is not liable for income tax on its receipt of the surrendered shares of the Transferee in MDC and the subsequent cancellation thereof by MDC since the same will be done to implement the decrease in capital stock of MDC pursuant to a partial liquidation. Upon receipt of the surrendered shares, MDC will not take title thereto nor receive any value for the surrendered shares. 2. MDC is not subject to the corporate income tax under Section 27(A) or to the capital gains tax imposed under Section 27(D)(5) both of the Tax Code of 1997, and consequently to the withholding tax imposed by Revenue Regulations No. 2-98, as amended, on the conveyance of the parcel of land to the Transferee as liquidating dividends since the same is not considered a sale of real property. 3. The Deed of Conveyance to be executed by and between MDC and the Transferee whereby the parcel of land shall be distributed as liquidating dividends to the Transferee is not subject to the Documentary Stamp Tax (DST) under Section 196 of the Tax Code of 1997, as amended, since the conveyance thereof is not considered a sale or disposition thereof and such conveyance is done without valuable consideration. 4. Any gain realized or loss sustained by the Transferee from the receipt of the liquidating dividends in the form of real property shall be treated as capital gain or loss and shall be taxable income or deductible loss by the Transferee. The liquidating gain (if any) shall be measured by the difference between the fair market value of the property received vis-a-vis the cost basis of the shares to the Transferee. The gain to be derived, if any, by the Transferee shall be subject to the regular individual income tax rate imposed under Section 24 of the Tax Code of 1997, as amended. TEIHDa 5. Finally, the conveyance by MDC of the property as liquidating dividends to the Transferee in redemption of the latter's shares of stock in MDC is not subject to twelve percent (12%) VAT imposed under Section 106(A) of the Tax Code of 1997, as amended, since the same is not done in the course of trade or business. 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