Who Pays Capital Gains Tax and Sale Registration Costs in Philippine Property Deals

When buying or selling real property in the Philippines, one of the most common points of confusion is who should pay the capital gains tax and the expenses for registering the sale. A 2004 Supreme Court decision provides valuable guidance on these questions, particularly when the seller is a corporation. The case of Vive Eagle Land, Inc. v. Court of Appeals (G.R. No. 150308, November 26, 2004) clarifies the rules on tax liability and registration costs in a chain of property sales.

The Facts of the Case

The dispute arose from a series of transactions involving a parcel of land in Cubao, Quezon City. The original owners, the Spouses Flores, sold the property to Tatic Square International Corporation (TATIC) in April 1988. TATIC then sold the same property to Vive Eagle Land, Inc. (VELI) the following day. Later that year, VELI sold one of the lots to Genuino Ice Co., Inc.

When Genuino demanded that VELI pay the capital gains tax for their sale and cover the registration expenses, VELI refused. The case reached the Supreme Court, which had to determine who bore these obligations.

The Issue on Capital Gains Tax

The central question was whether VELI, as a corporate seller, was liable for the capital gains tax on its sale to Genuino. The Court ruled that VELI was not liable.

Under the 1977 National Internal Revenue Code (NIRC), which was the law in effect at the time of the 1988 sale, the capital gains tax on the sale of real property applied only to individuals, not corporations. The applicable provision, which the Court quoted in its decision, expressly referred to individual taxpayers. The exact statutory text of this provision is not available in the ASG law library, but the Supreme Court's decision in this case confirms that the capital gains tax under the 1977 NIRC, as amended, devolved only upon individual taxpayers.

The Court noted that the Bureau of Internal Revenue had consistently ruled in several opinions that corporations were exempt from the final capital gains tax. Instead, corporations were required to include any gain from the sale of real property as part of their ordinary income, subject to the regular corporate income tax.

The Court emphasized that the later 1997 NIRC, which now imposes a 6% capital gains tax on corporations selling real property, could not be applied retroactively to the 1988 transaction. Only laws existing at the time of the contract's execution apply, unless a later statute expressly provides for retroactive effect.

The Issue on Registration Expenses

On the separate question of who should pay for the registration of the sale, the Court ruled differently. Under Article 1487 of the Civil Code, the expenses for the execution and registration of a sale shall be borne by the vendor (seller), unless there is a stipulation to the contrary.

Since the deed of sale between VELI and Genuino did not contain any agreement on who would shoulder the registration costs, the Court applied Article 1487 in a supplementary manner. VELI, as the seller, was therefore obliged to pay for the registration of the deed and the issuance of the new title in Genuino's name.

The Court also held that VELI was obliged to clear the property of squatters and occupants. Although a notarized deed of sale generally constitutes delivery of the property under Article 1498 of the Civil Code, this rule does not apply when the property remains occupied. The parties' own addendum showed that VELI was expected to evict the occupants, and Genuino was entitled to withhold P300,000 of the purchase price until this was done.

Practical Takeaways

• Corporations selling real property before 1998 were not subject to the capital gains tax; their gains were treated as ordinary income subject to corporate income tax. The 6% capital gains tax on corporate sellers took effect only under the 1997 NIRC, which became effective on January 1, 1998.
• The seller generally bears the expenses for registration of the sale and transfer of title under Article 1487 of the Civil Code, unless the parties agree otherwise. This rule applies regardless of whether the seller is an individual or a corporation.
• A notarized deed of sale does not always mean delivery of the property. If the property is occupied by tenants or squatters, the seller may still be obliged to clear the property and deliver actual possession.
• Assignments of rights must be properly documented to be effective against third parties. An assignment that is not in a public instrument or recorded may not bind the original parties to the earlier contracts.
• The applicable tax law is that which was in effect at the time of the sale, not the law at the time of payment or registration. Parties should verify the governing rules based on the date of their transaction.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.