Request for Review of Bureau of Internal Revenue Ruling No. 296-2014

December 18, 2019 DOF OPINION NO. 017-19 Atty. Antonio E. Escober Panopio Escober and Associates Law Offices 3rd Floor, AZPHI Building Ma. Aurora corner E. Zobel Streets Poblacion, Makati City SUBJECT : Request for Review of Bureau of Internal Revenue Ruling No. 296-2014 Dear Atty. Escober : This refers to the subject letter dated 06 April 2015 ("Request for Review") which you filed with this Department on behalf of your client Imperial Sky Garden Condominium Corporation ("Imperial Sky") to request for review of Bureau of Internal Revenue ("BIR") Ruling No. 296-2014 dated 24 July 2014 ("BIR Ruling"). In particular, the Request for Review prays for the reversal of the BIR's finding that the transfer from China Banking Corporation ("Chinabank") to Imperial Sky of the land and common areas in the Imperial Sky Garden Condominium Project ("Imperial Sky Garden") is not covered by Revenue Memorandum Order ("RMO") No. 18-2009 and, hence, is subject to the 6% creditable withholding tax pursuant to Revenue Regulations ("RR") No. 2-1998, as amended. DETACa On the other hand, as stated in your Request for Review, it is your main position that said BIR Ruling must be reversed because since Chinabank acquired all the rights and interest over the properties pursuant to a foreclosure sale, the subject transfer from Chinabank to Imperial Sky is compliant with the conditions of RMO No. 18-2009 and, therefore, exempt from income tax. We find that the BIR made a reversible error and, hence, reverse the BIR Ruling as discussed below . RMO No. 18-2009 does not provide requirements for tax exemption The BIR mainly hinged its denial of Imperial Sky's request for exemption on the fact that the subject transfer does not fall squarely on the facts provided under RMO No. 18-2009. Although we agree with the BIR that the subject transaction is different from the facts provided under RMO No. 18-2009, such is still not enough to deny exemption. RMO No. 18-2009 is entitled, "An Order Dispensing the Necessity of Securing a Ruling from the [BIR] as a Requisite for the Issuance of [Certificate Authorizing Registration/Tax Clearance] ("CAR/TCL") on the Conveyance of Land and Common Areas by the Real Estate Developer to the Condominium Corporation Organized in Accordance with the Provisions of [RA] No. 4726 for the Purpose of Holding Title to and Managing and Maintaining the Land and the Common Areas for the Benefit of the Condominium Unit Owners, as well as Prescribing the Policies and Guidelines to be Observed in the Issuance of CAR/TCL in Respect Thereto." Specifically, the RMO dispenses with the requirement of securing a prior ruling before any CAR/TCL can be issued by the BIR pertaining to the transfer of the land the common areas from the real estate developer to the condominium corporation. However, the RMO also provides that the taxpayer may still secure a prior ruling from the BIR to confirm the tax-exempt status of such transfer. Based on this, the BIR made a reversible error when it ruled that the transfer of the land and the common areas of the subject property from Chinabank to Imperial Sky is not exempt from tax because it is not similar to the facts provided under RMO No. 18-2009. The RMO does not provide the requirements for tax exemption. It merely provides that if the facts of the transfer of property are analogous to the facts in previously promulgated BIR rulings, the requirement of a prior BIR ruling can already be dispensed with. Again, the taxpayer can still opt to secure a BIR ruling to confirm the tax-exempt status of such transfer. Therefore, it was incorrect for the BIR to deny tax exemption solely based of RMO No. 18-2009. The subject transfer was made pursuant to RA No. 4726 RA No. 4726 defines a condominium as (1) an interest in real property consisting of separate interest in a unit in a residential, industrial or commercial building, and (2) an undivided interest in common, directly or indirectly, in the land on which it is located and in other common areas of the building. 1 In this regard, title to the land and common areas of the building may be held by a condominium corporation in which the unit owners shall automatically be members or shareholders, to the exclusion of others. 2 Such condominium corporation shall constitute the management body of the project, and its corporate purpose shall be limited to the holding of the common areas, to the management of the project, and other necessary, incidental, or convenient purposes of the project. 3 aDSIHc Any transfer or conveyance of a unit in the condominium shall include the transfer or conveyance of the undivided interest in the land and the common areas or the membership or shareholdings in the condominium corporation. 4 Hence, membership in a condominium corporation, regardless of whether it is a stock or non-stock corporation, shall not be transferable separately from the related condominium unit. 5 When a member or stockholder ceases to own a unit in the project in which the condominium corporation owns or holds the common areas, he/she shall automatically cease to be a member or stockholder of the condominium corporation. 6 Based on this, it is clear that the transfer of the land and the common areas of Imperial Sky Garden from Chinabank to Imperial Sky was only made pursuant to the requirements of RA No. 4726 and, hence, should be tax exempt. First, based on its Articles of Incorporation, Imperial Sky is a condominium corporation organized for the primary purpose of owning or holding title of the common areas of the Imperial Sky Garden, as well as to maintain, administer and manage the said project for the benefit and interest of the unit owners. Second, the transfer was made through a Deed of Conveyance entered into between Chinabank and Imperial Sky in compliance with the primary corporate purposes of Imperial Sky Garden, RA No. 4726, and the Imperial Sky Garden's Master Deeds and Declaration of Restrictions. Lastly, the transfer of the land and the common areas from Chinabank to Imperial Sky was made without consideration. The fact that Chinabank is not the original real estate developer is of no moment. First, RA No. 4726 does not require that the transfer of the land and the common areas to the condominium corporation must be from the original real estate developer. Further, Chinabank, as the mortgagee who foreclosed the property from the owner-developer, Chinabank is necessarily considered as the successor-in-interest of the subject property. Here, Imperial Sky, through counsel, correctly defined the term "successor-in-interest" to include a mortgagee who "succeeds to the interest of the debtor by operation of law," citing Gorospe v. Santos (G.R. No. L-30079, 30 January 1976). Chinabank, as the successor-in-interest of MERICO and RBDC, acquired interest over the property and stepped into the shoes of its predecessors ( Collado v. Heirs of Triunfante, Sr. , G.R. No. 162874, 23 November 2007). Because of this, its transfer of the land and the common areas to Imperial Sky is made in compliance of RA No. 4726. All in all, the BIR erred when it denied Imperial Sky's application for tax exemption. After reviewing the facts and the laws presented, we rule in favor of the Imperial Sky and find that the transfer of the subject property from Chinabank to Imperial Sky is exempt from income tax and, hence, is not subject to 6% creditable withholding tax under Section 2.57.2 (F) of RR No. 2-1998, as amended. This ruling is being issued based on the preceding facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. ETHIDa Thank you. Sincerely yours, (SGD.) CARLOS G. DOMINGUEZ Secretary Footnotes 1. Section 2, The Condominium Act. 2. Section 2, The Condominium Act. 3. Section 10, The Condominium Act. 4. Section 5, The Condominium Act. 5. Section 10, The Condominium Act. 6. Section 10, The Condominium Act.