Need to Pay Capital Gains Tax and Documentary Stamp Tax for Purposes of Registering the Grant of a Right of Way, Considering that the Title Over the Property Remains in the Name of the Landowner

June 5, 1997 BIR RULING NO. 067-97 21 (e); 630 NCC 000-00 67-97 Abcede, Flores and Forbes Law Office 11 Perez St. Lucena City Attention: Atty . Jose C . Flores, Jr . Gentlemen : This refers to your faxed letter dated June 13, 1996 stating that your client was granted an easement of right of way over several parcels of land in Mauban and Tayabas, Quezon; that for the said grant of right of way, corresponding fees were paid by your client to the landowners concerned; that when your clients brought the documents (Grant of Right of Way) to the Registry of Deeds of Quezon for registration, your client was required to pay capital gains tax and documentary stamp tax before the said right of way may be registered; and that to facilitate the matter, your client paid the amount of capital gains tax required as well as the documentary stamp tax. Based on the foregoing, you are requesting clarification as to whether, there is a need to pay capital gains tax and documentary stamp tax for purposes of registering the Grant of a Right of Way, considering that the title over the property remains in the name of the landowner. In reply, please be informed that pursuant to Section 21(e) of the Tax Code, as amended, capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets including pacto de retro sales and other forms of conditional sales by individuals, including estates and trusts shall be taxed at the rate of 5% of the gross selling price or fair market value prevailing at the time of sale, whichever is higher. An easement of right of way is not a sale or transfer of real property because the owner of the servient estate retains ownership of the portion on which the easement is established and may use the same in such a manner as not to effect the exercise of the easement. (Article 630, New Civil Code) Such being the case, the owners who granted easement of right of way to your client are not subject to the capital gains tax imposed by Section 21 (e) of the Tax Code, as amended, and to the documentary stamp tax prescribed under Section 96 of the same Code. It is however understood that the income derived by the owners of the servient estate from and as a consequence of the Grant of Right of Way is subject to income tax. aisadc Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue