Tax Consequences of Transfer of Properties in Favor of a Liquidator

May 31, 2002 BIR RULING NO. 021-02 Atty. Danilo L. Concepcion Liquidator, EYCO Group of Companies c/o Tan Concepcion & Bawagan Law Offices Suites 2104-2106, Medical Plaza Ortigas Bldg. San Miguel Avenue, Ortigas Center 1605 Pasig City Gentlemen : This refers to your letter dated 30 April 2002, as the SEC appointed Liquidator for the EYCO Group of Companies, requesting confirmation of your opinion on the tax incidents of the transactions as described below. It is represented that on September 16, 1997, a petition for Suspension of Payments, Formation and Appointment of Rehabilitation Receiver/Committee, Approval of Rehabilitation Plan with Alternative Prayer for Liquidation and Dissolution of Corporations (the "Petition") was filed by the eleven (11) companies comprising the EYCO Group of Companies (EYCO) and the individuals Eulogio Yutingco, Caroline Yutingco-Yao and Teresa Lao, before the Securities and Exchange Commission (SEC); that the case is now pending and docketed as SEC Case No. 09-97-5764; that EYCO is comprised of the following companies: 1. Nikon Industrial Companies 2. Nikolite Industrial Corporation 3. 2000 Industries Corporation 4. Trade Hope Industrial Corporation 5. First Unibrands Food Corporation 6. Integral Steel Corporation 7. Clarion Printing House, Inc. 8. Nikon Plaza, Inc. 9. Nikon Land, Inc. 10. EYCO Properties, Inc. 11. Thames, Philippines that on September 14, 1999, after the lapse of two years from the filing of the Petition, the SEC En Banc issued an Order declaring EYCO insolvent and ordering its liquidation and dissolution; that on May 31, 2001, the SEC appointed you, Atty. Concepcion, as Liquidator for EYCO. It is also represented that on March 11, 2002, in compliance with your assigned task, you submitted for approval by the SEC a Liquidation Plan for EYCO (the "Plan"); that in its Order dated April 11, 2002, the SEC approved the Plan; that pursuant to the Plan, EYCO and the Spouses Eulogio Yutingco and Wong Bee Kuan (hereafter "Yutingcos"), being the majority stockholders therein, have agreed, among others, to surrender to the Liquidator the property located in Valenzuela City and known as "Ramitex Property" for the benefit of EYCO's unsecured creditors; that the proposed Deed of Transfer provides that the Liquidator shall hold legal title to the Ramitex property in trust and for the benefit of the unsecured creditors; that the proposed Deed of Transfer provides that the liquidator shall hold legal title to the Ramitex property in trust and for the benefit of the unsecured creditors; that the Ramitex Property consists of the following parcels of land, together with existing improvements thereon: TCT No. Reference in Plan Area Registered Owner/s V-48193 Ramitex Lot 1 10,506 EYCO Properties, Inc. V-48192 Ramitex Lot 2 51,588 Nikon Plaza, Inc. V-39089 Ramitex Lot 3 139,537 San Miguel Corporation * V-49678 Ramitex Lot 4 16,958 Eulogio Yutingco & Ten Leng Valencia ** It is further represented that Ramitex Lot 1 is now the subject of a case initiated by the Liquidator in order to recover the same from a third party who succeeded in foreclosing the same; that a similar case for recovery of Ramitex Lot 4 will shortly be filed by the Liquidator also against the same party who foreclosed Ramitex Lot 1; that in the event of recovery, the aforesaid two Ramitex Lots will be brought within the operation of the Plan and disposed of in the manner described below and subject to the tax incidents that are the subject of the instant request for ruling. It is finally represented that in accordance with the terms of the Plan, the following steps shall be taken: 1. The Yutingcos shall execute a Declaration of Trust confirming that Ramitex Lot 3 is a corporate asset and was acquired by them, for and on behalf of and as mere trustees for EYCO. 2. Ramitex Lots 2 and 3 shall, thereafter, be conveyed by the Yutingcos and EYCO to the Liquidator through the execution of a corresponding Deed of Transfer/Conveyance (hereinafter, "Deed of Transfer"). The Liquidator shall, in turn, execute a Declaration of Trust acknowledging that he shall cause registration of the properties in his name and hold legal title thereto as trustee for EYCO. ITScHa In connection with the foregoing, you request confirmation of your opinion as follows: 1. Since there will be no consideration for the transfer/conveyance of the Ramitex Lots 2 & 3 from the Yutingcos and EYCO to the undersigned Liquidator, no corporate income tax shall accrue and become collectible under the Tax Code and pertinent Regulations, either by way of capital gains tax or creditable withholding tax. 2. The transfer/conveyance of the Ramitex Lots 2 & 3 to the Liquidator will not be subject to the 10% value-added tax (VAT). Under Section 4.100-1 of Revenue Regulations No. 7-95, the transmission of property to a trustee shall not be subject to VAT if the property is to be merely held in trust for the trustor and/or beneficiary. 3. There being no donative intent on the part of the Yutingcos and EYCO, the transfer/conveyance will not be subject to the donor's tax. 4. The Deed of Transfer/Conveyance to be executed by the Yutingcos and EYCO will not be subject to the documentary stamp tax (DST) imposed under Section 196 of the Tax Code there being no monetary consideration involved. The same will be subject only to the P15.00 DST under Section 188 of the Tax Code. In this regard, we note that in the Order dated January 13, 1998, issued by Judge Salvador S. Tensuan of Branch 146, Regional Trial Court of Makati, Ramitex Lot 3 which is covered by TCT No. 3909 of the Registry of Deeds of Valenzuela, Metro Manila, is still in the name of San Miguel Corporation but has been proven to be already owned by the Yutingcos pursuant to a Deed of Absolute Sale. It should be noted that prior to the transfer/conveyance of Ramitex Lot No. 3 to the Liquidator, the applicable taxes on the transfer of property from San Miguel Corporation to the Yutingcos should have been paid. In reply, please be informed that Section 27 (D) (5) of the Tax Code of 1997 provides that a final tax of six percent (6%) is hereby imposed on the gains 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 the said Code, whichever is higher, of such lands and/or buildings. DEcITS On the other hand, Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended, provides that a creditable withholding tax based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the withholding agent/buyer, in accordance with the following schedule: A. Where the seller/transferor is exempt from creditable withholding tax in accordance with Sec. 2.57.5 of these regulations Exempt B. Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business: With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less 1.5% With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not more than Two Million Pesos (P2,000,000.00) 3% With a selling price of more than Two Million Pesos (P2,000,000.00) 5% C. Where the seller/transferor is not habitually engaged in the real estate business 6% In the instant case, considering that there is no transfer of ownership, but rather a trust is to be created by virtue of the execution of Deed of Transfer on Ramitex Lots 2 and 3 by the Yutingcos and EYCO in favor of the Liquidator, with no monetary consideration involved for such transfer, this Office is of the opinion as it hereby holds that the transfer of the aforesaid properties in favor of the Liquidator will not be subject to capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997 nor to the expanded withholding tax prescribed in Revenue Regulations No. 2-98, as amended. Moreover, Section 181 of Regulation No. 26 provides that a deed executed by a debtor covering an assignment of property to a trustee to be held for the benefit of a creditor is not subject to tax. However, it also provides that when the trustee sells or conveys such property either to the creditor or any person, the deed executed by him is taxable. Thus, Section 181 of Regulations No. 26 states that "SEC. 181. Deed to trustee for benefit of creditor. A deed executed by a debtor covering an assignment of property to a trustee to be held for the benefit of a creditor is not subject to tax. When, however, the trustee sells or conveys such property either to the creditor or any other person, the deed executed by him is taxable." Accordingly, the Deed of Transfer to be executed by and between the Yutingcos and EYCO, as Trustors, and Liquidator, as Trustee, for the benefit of the creditors, is not subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997 but the acknowledgment thereof is subject to the P15.00 documentary stamp tax prescribed in Section 188 of the said Code. Further, in accordance with Section 4.100-1 of Revenue Regulations No. 7-95 which provides that transmission of property to a trustee shall not be subject to VAT if the property is to be merely held in trust for the trustor and/or beneficiary, the conveyance between the Yutingcos and EYCO on the one hand, and the Liquidator on the other, is not subject to the 10% VAT. The said Section states "Section 4.100-1. Value-added tax on sale on goods or properties. "xxx xxx xxx" "Transmission of property to a trustee shall not be subject to VAT if the property is to be merely held in trust for the trustor and/or the beneficiary". Moreover, the above transaction is not subject to donor's tax imposed under Section 99 of the Tax Code of 1997 as there is no intention to donate on the part of the Yutingcos and EYCO. However, should the Liquidator, as trustee, sell or convey by dacion en pago such property either to any creditor or any person in the future, the deed of transfer to be executed by the Liquidator will be subject to the capital gains tax or withholding tax as the case may be, to the VAT, if applicable, as well as to the documentary stamp tax under Section 196 of the Tax Code of 1997. 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.) EDMUNDO P. GUEVARA Officer-in-Charge