Recording at Book Value of Property Dividends to be Declared

November 16, 1994 BIR RULING NO. 156-94 34 (c) (2) (c) 000-00 156-94 Roco Bunag Kapunan Migalles & Jardeleza Law Offices 16th Floor, Strata 200 Building Emerald Avenue, Pasig 1600 Attention: Atty . Jose Marie C . Bunag Gentlemen : This refers to your letter dated February 28, 1994 stating that your client, Foodmine, Inc. (Foodmine) is a domestic corporation with an authorized capital stock of Three Million Pesos (P3,000,000.00), divided into Thirty Thousand (30,000) common shares of stock with a par value of One Hundred Pesos (P100.00) per share, of which Twenty Two Thousand (22,000) common shares of stock are issued and outstanding as of December 31, 1992; that as of December 31, 1992, it had a total stockholder's equity in the amount of Twenty Seven Million Sixty Seven Thousand Seven Hundred Seventy One Pesos (P27,067,771.00), which includes unrestricted retained earnings in the amount of P23,796,245.00; that Foodmine proposes to declare a portion of its retained earnings as of December 31, 1992 as property dividends in favor of all stockholders of record as of the date of the Board meeting during which the dividends are declared; that said dividends shall be distributed in the form of real properties with a total book value of P2,606,000.00: Properties Book Value 1. A parcel of land situated in P428,000.00 Makati Avenue, Makati, Metro Manila 2. A parcel of land situated in 2,178,000.00 Claro M. Recto Avenue Metro Manila TOTAL P 2,606,000.00 =========== that the aforementioned real properties, while presently being used in the trade of business of Foodmine as sites of its branch outlets, need not be owned by Foodmine which can simply lease the sites of its outlets that in fact, most of its other outlets are leased; that said properties declared as dividends are recorded in the books of the corporation at their book values; and that the total book value of the property dividends is equivalent only to two & 3/10 percent (2.3%) of Foodmine's assets for the year ended 31 December 1992. cdta In connection therewith, you are requesting confirmation of your opinion that "1. The property dividends to be declared consisting of real estate properties can be recorded at their respective book value in the books of Foodmine and Foodmines' stockholders can record the dividends thus received at Foodmine's book value; "2. The proposed property dividend which shall be received by the stockholders of Foodmine shall be subject to a final withholding tax of zero (0%) percent, and the receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of these real estate properties as property dividend; "3. Upon subsequent sale or other disposition of the real estate properties received as property dividend by Foodmine's stockholders, the basis of the taxation of the subsequent sale or other disposition shall also be its book value at the time of the dividend distribution; and "4. The amount of the documentary stamp tax on the Deeds of Conveyance to be executed between Foodmine and the recipient stockholders covering the real estate properties, at the rate of fifteen (15) pesos for every one thousand pesos (P1,000.00) or a fractional part thereof, of the book value of the real properties declared as dividends (Section 196, Tax Code, as amended by R.A. No. 7660) The documentary stamp tax shall be due and payable on the day of execution of the Deeds of Conveyance (Section 173, Tax Code, as amended by R.A. No. 766) In reply thereto, please be informed as follows: (1) That the property dividend shall be recorded at book value in the books of both the issuing corporation and the recipient stockholder; (2) That the proposed property dividend which shall be received by the stockholders of Foodmine shall be subject to a final withholding tax of zero (0%) percent, and the receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of these real estate properties as property dividend. However, property dividends which are distributed by the company to its shareholders and declared out of retained earnings beginning October 1, 1994 shall be subject to VAT based on the market value or zonal valuation, whichever is higher, at the time of receipt; a (3) That upon the subsequent sale or other disposition of the real estate properties received as property dividends by Foodmine's stockholder-corporation, the gain which is the difference between the book value at the time of the receipt of the property dividend and the fair market value/zonal value at the time of its disposition shall be subject to the 35% corporate income tax. Moreover, the subsequent sale or other disposition of the real estate properties received as property dividends by Foodmine's stockholder-corporation shall be subject to the 7.5% creditable expanded withholding tax based on the gross selling price or total amount of consideration or its equivalent paid to the seller/owner under Revenue Regulations No. 12-94, as amended; Furthermore, the subsequent sale or other disposition of the real properties received as property dividends by individual stockholders shall be subject to the 5% capital gains tax based on the gross selling price or fair market value prevailing at the time of sale whichever is higher under Section 21(e) of the Tax Code, as amended. (4) That the Deed of Conveyance to be executed between Foodmine and the recipient stockholders covering the real estate properties declared as property dividends, not being a sale and without monetary consideration shall not be subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended but only to the documentary stamp tax of P10.00 pursuant to Section 188 of the Tax Code, as amended (BIR Ruling Nos. 108-93 dated March 16, 1993; 498-93 dated December 20, 1993). (5) That the book value of the property dividend (real property) must be annotated at the back of the Transfer Certificate of Title of the real property which shall serve as the basis of the computation of the tax upon its subsequent disposition. cdtech Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue