Prime Bonanza Property Developers, Inc.

December 18, 2009 BIR RULING [DA-(C-326) 795-09] 27 (D) (5); 39 (A); 106; 197-2007; DA-692-2006; DA-155-05; DA-653 & 654-2006; DA (C-40) 541-2003 Prime Bonanza Property Developers, Inc. No. 1881 Pres. Quirino Avenue Extension Pandacan, Manila Attention: Mr. Desiderio L. Laperal President Gentlemen : This refers to your letter dated December 7, 2009 requesting for confirmation of your opinion that the intended sale of real properties by Prime Bonanza Property Developers, Inc. to third party is subject only to capital gains and documentary stamps taxes. The facts as represented are as follows: Prime Bonanza Property Developers, Inc. (formerly, Bonanza Property Broker, Inc.) is a domestic corporation duly organized and existing under the laws of the Philippines with Securities and Exchange Commission (SEC) Certificate of Registration No. ASO91-196336 and Taxpayers Identification No. 000-661-965-000. Its primary purpose is to engage in the realty business. Prime Bonanza Property Developers, Inc. has not commenced any commercial operation except for acquiring the parcel of land covered by Transfer Certificate of Title No. 177313 of the Registry of Deeds of Makati City. The above real property has an existing improvement used as a residence, however, said realty has never generated any income nor Prime Bonanza Property Developers, Inc. has 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 it has not commenced its realty business since the time of its inception. Furthermore, since Prime Bonanza Property Developers, Inc. has not started commercial operations since it was incorporated, it has been decided by its incorporators to dispose the subject real properties of the corporation converting the same to cash assets for convenience in case of liquidation. From the foregoing, you are requesting confirmation of your opinion that the above-mentioned parcel of land and the improvements found thereon, are considered as capital assets of Prime Bonanza Property Developers, Inc., 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.: ASHaDT "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." 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 Prime Bonanza Property Developers, Inc. are properly classified as capital assets because it holds such properties as investment. Prime Bonanza Property Developers, Inc. never used said realties in business, hence, the improvement found on the above-mentioned parcel of land was never subjected to depreciation, nor did they form part of the company's inventory as it failed to engage in the real estate business. Accordingly, the intended sale of said real properties by Prime Bonanza Property Developers, Inc. 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 Prime Bonanza Property Developers, Inc., 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service