BIR Ruling No. 363-14

September 22, 2014 BIR RULING NO. 363-14 Secs. 73 (A), 27 (A), 27 (D) (5) of the Tax Code of 1997, as amended; RR 2-98; RR 6-2008; 000-00 Promera Realty Corporation 772 Harvard Road Wack-Wack, Mandaluyong City Attention: Eduardo Mangalino/Roberto A. Maquiling Authorized Personnel Gentlemen : This refers to your letter dated October 11, 2012, received by this Office on even date, requesting for exemption from the tax on the Deed of Assignment executed by and between Promera Realty Corporation and Ramon I. Diaz. Documents submitted disclosed that Promera Realty Corporation (TIN 219-375-674-000), is a domestic corporation engaged to acquire by purchase, lease, donation or otherwise, and to own, use, improve, develop, subdivide, sell, mortgage, exchange, lease, develop and hold for investment, real estate of all kinds, whether improve, manage or otherwise dispose of buildings, houses, apartment, condominiums and other structures of whatever kind, together with their appurtenances; that it is registered with the Securities and Exchange Commission (SEC) under SEC Registration No. A200205918; that according to its SEC General Information Sheet (GIS) for the year 2012, the following have subscribed shares of stock: Name No. of Shares Amount Amount Subscribed Subscribed Paid-Up Ramon I. Diaz, Jr. 14,809 P14,809,000.00 P14,799,000.00 Mercedes I. Diaz 1 1,000.00 1,000.00 Mercedes Corazon I. Diaz 1 1,000.00 1,000.00 Aurora Corazon I. Diaz 1 1,000.00 1,000.00 Priscilla Corazon I. Diaz 1 1,000.00 1,000.00 Total 18,620 P18,620,000.00 P14,800,000.00 ====== ============ ============ that on January 30, 2012, a majority of the Board of Directors and by the vote of the stockholders owning or representing all of the outstanding capital stock have approved a resolution amending Article IV of the Articles of Incorporation of the Promera Realty Corporation by shortening the term of its existence thereby dissolving the said corporation on February 29, 2012 and was approved by the SEC on July 22, 2013; that on October 8, 2012, a Deed of Assignment was executed by and between Promera Realty Corporation and Ramon I. Diaz whereby the former transferred to the latter, by way of liquidating dividends, a parcel of land covered by Condominium Certificate of Title (CCT) No. 93672 issued by the Registry of Deeds for City of Makati; that CCT No. 93672 was formerly CCC No. 74767, transferred to Promera Realty Corporation under tax free exchange by Mercedes I. Diaz in exchange of 14,800 shares with a substituted basis of P19,372,045.45; that on January, 2012, Mercedes I. Diaz sold 14,799 shares to Ramon I. Diaz, Jr., for P500,000.00 with market value of P14,799,000.00 as evidence by Certificate Authorizing Registration (CAR) issued by Revenue District Office (RDO) No. 65-Naga City; that Ramon I. Diaz became the majority stockholder of Promera Realty Corporation owning Ninety Nine and 99/100 (99.99%) of the total equity of the corporation; and that Bureau of Internal Revenue (BIR) Revenue District Office (RDO) No. 041-Mandaluyong issued a Certificate of No Outstanding Tax Liability to Promera Realty Corporation dated June 19, 2013. ISHCcT In reply, please be informed as follows: Corporate Income Tax The transfer by the liquidating corporation of its remaining assets to its stockholders in exchange for the surrender and cancellation of the shares is not a sale, hence the same is exempt from corporate income taxes, creditable withholding and documentary stamp taxes under Revenue Regulations No. 1-90, as amended by RR 6-2001 and further amended by RR 17-2003. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. (W.P. Fox & Sons, Inc., Petitioner vs. Commissioner of Internal Revenue, Respondent, 15 BTA 115; Jordan Petroleum Company, 13AFTR 2d 1692 (227 F. Supp. 174); JTS Brown & Son Company vs. Commissioner of Internal Revenue, 10TC 840) Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial redemption. However, the second paragraph of Section 73 (A) of the Tax Code of 1997 states: "Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be." Moreover, Section 8 of Revenue Regulations (RR) No. 6-2008, states: SEC. 8. Taxation of Surrender of Shares by the Investor upon Dissolution of the Corporation and Liquidation of Assets and Liabilities of Said Corporation. Upon surrender by the investor of the shares in exchange for cash and property distributed by the issuing corporation upon its dissolution and liquidation of all assets and liabilities, the investor shall recognize either capital gain or capital loss upon such surrender of shares computed by comparing the cash and fair market value of property received against the cost of the investment in shares. The difference between the sum of the cash and the fair market value of property received and the cost of the investment in shares shall represent the capital gain or capital loss from the investment, whichever is applicable. If the investor is an individual, the rule on holding period shall apply and the percentage of taxable capital gain or deductible capital loss shall depend on the number of months or years the shares are held by the investor. Section 39 of the Tax Code, as amended, shall herein apply in all possible situations. TCHcAE The capital gain or loss derived therefrom shall be subject to the regular income tax rates imposed under the Tax Code, as amended, on individual taxpayers or to the corporate income tax rate, in case of corporations. Thus, in the event that the liquidating dividend in the form of properties is more than the amount/value of investment, the gain realized by a stockholder from the distribution of the assets in liquidation is subject to the normal tax in like manner as if he had sold his stock to third persons. (Wise & Co. vs. Bibiano L. Meer, 078 Phil. 655, dated June 30, 1947) Nonetheless, this Office has held that the liquidating gain, which is the difference between the adjusted cost of the shares and the fair market value of the properties given as liquidating dividend is subject to the ordinary income tax rates and not to the capital gains tax on the sale of shares. Accordingly, the gain which is the difference between the adjusted cost of the shares and the fair market value of the property given as liquidating dividend to Ramon I. Diaz shall be subject to the ordinary income tax rates and not to the capital gains tax on the sale of shares. Documentary Stamp Tax (DST) Section 189 of Revenue Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations provides, viz. : "Section 189. Conveyances by corporation to owner of all the capital. A conveyance of real estate by a corporation without valuable consideration to an owner of all its capital stock in consequence of its dissolution is not subject to tax." Pursuant to the abovequoted Section 189, the distribution of the assets of the corporation to its stockholders in liquidation of the business without consideration is viewed as a return of capital to the shareholders. Considering this, the provision of Section 196 of the Tax Code of 1997, as amended, shall not apply. Thus, it has been held that a corporation that distributes its assets to its shareholders as liquidating dividends is not deemed to be selling such assets to the latter. Accordingly, the transfer by Promera Realty Corporation of CCT No. 93672 to Ramon I. Diaz shall not be subject to DST imposed under said Section 196 of the Tax Code, as amended. The notarial certification on the deed of assignment is, however, subject to the DST of P15.00 imposed under Section 188 of the same Tax Code. DEHaAS Value-Added Tax Pursuant to Section 106 (B) (4) of the Tax Code of 1997, as amended, which provides that: Section 106. Value-Added Tax on Sale of Goods or Properties. xxx xxx xxx (B) Transactions Deemed Sale. The following transactions shall be deemed sale: xxx xxx xxx (4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement and cessation. Since the conveyance by Promera Realty Corporation of CCT No. 93672 to Ramon I. Diaz as liquidating dividends falls under the purview of the above-quoted provision, the same shall be subject to the 12% Value-Added Tax. Finally, the stockholders who sell the real property received by them as liquidating dividends immediately after title thereto is transferred to their name are subject to the final capital gains tax imposed under Section 24 (D) (1) of the Tax Code, as amended, in the case of individual distributees and Section 27 (D) (5) thereof, in the case of corporate distributees. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue