Tax Implication of Certain Transactions

February 22, 1989 BIR RULING NO. 028-89 21 (c) (2) 274-86 028-89 Gentlemen : This refers to your letter dated January 23, 1989, requesting information as to the tax implication of certain transactions of your client, Mabanta & Co., Inc. a domestic stock corporation, doing business solely in the Philippines whereby it intends to declare and pay property dividends consisting of land and other real property to its resident citizen stockholders sometime in 1989; and that the dividends represent profits accumulated in 1988 and prior years. In reply, please be informed as follows: 1. Dividends comprise any distribution whether in cash or other property, in the ordinary course of business, even though extraordinary in amount, made by a domestic or resident foreign corporation to the stockholders out of its earnings or profits. Moreover, dividends paid in securities or other property (other than its own stock) in which the earnings of a corporation have been invested, are income to the recipients to the amount of the full market value of such property when receivable by individual stockholders. (Section 250 and 251, Revenue Regulations No. 2) Accordingly, your client can distribute its property dividends consisting of land and other real property to its resident citizen stockholders who are subject to tax at 0% effective January 1, 1989. [Sec. 21(c)(2), Tax Code, as amended by Executive Order No. 37]. 2. Dividends for income tax purposes "means any distribution made by a corporation to its shareholders out of its earnings or profits accrued since March 1, 1913 and payable to its shareholders whether in money or in other property." (Sec. 66, Tax Code). Said dividends comprise any distribution whether in cash or property made by a domestic corporation to the shareholders out of its earnings of profits accumulated since March 1, 1913. (Sec. 250, Revenue Regulations No. 2) Moreover, the rule is that dividends are taxable income for the year in which they are received or unqualifiedly made subject to the stockholder's demand. (Am. Jur. 2d, 1976 Ed., Vol. 34, p. 180) Accordingly, the property dividends in question, although accumulated in 1988 and prior years, are subject to tax at 0% in 1989 when they are distributed and paid to the stockholders. 3. The aforesaid property dividend in the form of land is exempt from the 5% capital gains tax. However, a certificate authorizing transfer of real property without payment of the capital gains tax shall be secured from the Revenue District Officer of the Revenue District where the property is located before said property is transferred in the name of the stockholder. cdta Very truly yours, (SGD.) JOSE U. ONG Commissioner