BIR Ruling No. 206-99

December 28, 1999 BIR RULING NO. 206-99 Fantasy World Theme Parks Amusement and Recreation Club, Inc . 203 New Holiday Plaza Building Libertad cor. F.B. Harrison Streets Pasay City, Metro Manila Attention: Mr . Alexander E . Ramos External Auditor Gentlemen : This refers to your letter dated June 28, 1999 stating that the Fantasy World Theme Parks, Amusement and Recreation Club, Inc., is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) as a non-profit corporation under SEC Registration No. A199709244; that it is the owner of a world class Country Club and Resort Project known as the Fantasy World Theme Parks, Amusement and Recreation Club; that it is primarily organized for the purpose of establishing and maintaining theme parks in Lemery, Batangas and elsewhere in the Philippines complete with amusement and recreational facilities for the purpose of providing, fostering and promoting recreational, athletic, social and cultural activities among its members, their families and guests; that as a non-profit organization, no part of the net income of the company inures to the benefit of any of its member; that on the other hand, ECE Realty and Development Corporation, is the developer and seller of that World Class Country Club and Resort Project and exclusive marketing arm of the membership certificates; that Fantasy World Theme Parks, Amusement and Recreation Club Inc. is conceptualized to be for the exclusive use and enjoyment only of club members and their families and guests; that membership to the club is through subscription and full payment of at least one (1) share, for which a membership certificate is issued by the company; that the holders of membership certificates are not entitled to dividend; that they are required to pay monthly dues during the enjoyment of the privileges of the club; that the rights and privileges are governed by the rules of the club and of the by-laws of the company; that the total membership certificate duly registered by the company with the SEC is 80,000; that these certificates are not traded in an exchange (or over the counter); and that the selling and distribution of the same are handled by the developer of the project. llcd Based on the foregoing representations, you now request for a ruling on the tax implications of the issuance and/or transfer of the said membership certificates. In reply, please be informed as follows: 1. Section 105 of the Tax Code of 1997 provides: "Sec. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the Value-added tax (VAT) imposed under Sections 106 to 108 of this Code. "xxx xxx xxx "The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. "xxx xxx xxx Such being the case, since the transfer of its membership certificates by Fantasy World Theme Parks, Amusement and Recreation Club, Inc., a non-profit organization which is not a dealer in securities through its developer, as wells as its billing and collection of membership dues from its members are not the economic activity being contemplated in the above-mentioned Section, the transfer of the membership certificates is therefore not subject to the 100% VAT. 2. Section 27(D)(2) of the Tax Code of 1997 provides that "Sec. 27. Rates of Income Tax on Domestic Corporations. "(D) Rates of Tax on Certain Passive Incomes. "(1) xxx xxx xxx "(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange, or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: "Not over P 100,000 5% "Amount in excess of P100,000 10% Likewise, Section 6(a)(3) of Revenue Regulations No. 2-82 provides that in determining the tax base in case of sale, transfer or exchange of shares not listed in the stock exchange, the unlisted shares shall be valued at their book value nearest the valuation date. The book value of these unlisted shares of stock shall be prima facie considered as the fair market value. However, if there have been previous bona-fide sales/exchanges of the unlisted shares of stock, the price at which these shares exchanged hands should be taken/considered as its fair market. Accordingly, the transfer of the membership certificates by Fantasy World Theme Parks, Amusement and Recreation Club, Inc., which is not listed in the local stock exchange shall be subject to capital gains, tax imposed under Section 27(D)(2) of the said Code based on their book value nearest the valuation date. 3. Finally, Section 22(L) of the Tax Code of 1997 provides that the term "shares of stock" shall include shares of stock of a corporation, warrants and/or options to purchase shares of stock, as well as units of participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations, associations, and recreation or amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates. Corollarily, Section 175 of the said Code provides "Sec. 175. Stamp Tax On Original Issue of Shares of Stock. On every original issue, whether on organization, reorganization or for any lawful purpose, of shares of stock by any association, company or corporation, there shall be collected a documentary stamp tax of Two pesos (P2.00) on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of stock: Provided, That in the case of the original issue of shares of stock without par value, the amount of the documentary stamp tax herein prescribed shall be based upon the actual consideration for the issuance of such shares of stock: Provided, further, That in the case of stock dividends, on the actual value represented by each share." Considering that the membership certificate is in the nature of a series of stock as defined in Section 22(L) of the Tax Code of 1997, the original issuance thereof by Fantasy World Theme Parks, Amusement and Recreation Club, Inc. is subject to the documentary stamp tax imposed under Section 175 of the said Code. The sale, however, is subject to the documentary stamp tax of P1.50 on each P200, or fractional part thereof, of the par value of such membership certificate pursuant to Section 176 of the Tax Code of 1997. llcd 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.) BEETHOVEN L. RUALO Commissioner of Internal Revenue