BIR Ruling No. 404-2020

REPUBLICOF THE PHILIPPINES.

DEPARTMENT OF FINANCE

BUREAU OF INTERNAL REVENUE

Quezon City

27(D)(5); 39(A)(1).RR 7-2003

BIR Ruling No. 014-03;

BIR Ruling No.634-17;

BIR Ruling No.480-17; BIR Ruling No.187-17 VAT-0404-2020

JUL 2 3 2020

TERENCIO R.YUMANG JR.& ASSOCIATES

Suite 1102, 11/F 139 Corporate Center, Valero Street Salcedo Village, 1227 Makati City

Attention: Atty. Agnes B. Santos

Associate

Gentlemen:

This refers to your letter dated January 7, 2020 requesting on behalf of your

client, Cleon Philippines Holdings Corporation (Cleon for brevity), for confirmation

that the sale of real properties held by Cleon for investment purposes is subject to the 6%

capital gains tax under Section 27(D)(5) and documentary stamp tax under Section 196.

both of the Tax Code of 1997, as amended, but is not subject to value-added tax (VAT).

Based on your representations, as well as from the documents submitted, the facts

are as follows:

1. Cleon was incorporated as a holding company and registered with the

Securities and Exchange Commission (SEC) on January 25, 2016. It was also

registered with the BIR on September 19, 2017 under Line of Business

or as engaged in Financial Holding Company Activities.

2. Cleon was organized as a holding company pursuant to the purpose-of the

incorporators, and its primary purpose as originally provided in its Articles of

Incorporation was - to purchase, subscribe for, or otherwise acquire and

own, hold, use, sell, assign, transfer, mortgage, pledge, exchange, or otherwise

dispose of real and personal property of every kind and description including

but not limited to land, buildings, condominium units, shares of stock, bond.

debentures, notes, evidences of indebtedness, and other securities, contract or

obligations of any corporation or corporations, associations, domestic or

foreign, and to pay therefore, in whole or in part, in cash or by exchanging

VAT-0404-2020

JUL 2 3 2020

therefore stocks. bonds, or other evidences of indebtedness or securities on any other corporation and while the owner or holder of any such real property. stocks, bonds, debentures, notes, evidences of indebtedness or other securities, contracts, or obligations, to receive, collect and dispose of the interest,

dividends and income arising from such property and to possess and exercise in respect thereof, all the rights, powers and privileges of ownership, including

all voting power on any stocks so owned, provided, however, that nothing

herein shall be construed to authorize the Corporation to engage in the business of an investment company or an investment house and without acting

as broker/dealer of securities".

3. Sometime in 2017. Cleon purchased 25 parcels of adjacent lots with a total

area of 54,598.17 square meters located at J.P. Rizal St., Barangays Vergara

and Namayan, Mandaluyong City, for investment purposes and not for sale or

for lease in the ordinary course of business. Consonant with Cleon's objective

in acquiring the parcels of land for investment purposes, the said parcels of

land was lodged under Non-cul Assets" caption of Cleon's Audited

Financial Statement v with th T Investment PropertyThese are

the only real propertie urchaseg and owned by Cleon up to the present,

which it held for capital appreci 0 D nsonant with its nature as a holding

company. Said properties remained idle and undeveloped and Cleon has

remained non-operational and did not engage in any income-producing

business activity from the time of its incorporation

4.The 25 parcels of land are covered by the following Transfer Certificates of

Title (TCT) No.

TCT No. AREA in square meters

5,441.17

206 206 205 195 413 201

501 206

204 3,587 17,181

212 5,054 12,606

190 6,353

VAT 040 4 - 20 20

JUL2 3 2U

224

224 219 22 150 204 207 207 54,598.17

5. The issue is whether or not the subject properties are capital assets of Cleon.

In reply, please be informed that the term "capital asset" as negatively defined in Section 39(A)(1) of the Tax Code of 1997, as amended, means property held by the

taxpayer (whether or not connected with his trade or business), but does not include stock

in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held

by the taxpayer primarily for sale to customers in the ordinary course of his trade or

business, or property used in the trade or business, of a character which is subject to the

allowance for depreciation provided in Subsection (F) of Section 34, or real property used in trade or business of the taxpayer.

An idle property may be classified as capital asset or ordinary asset. Revenue Regulations (RR) No. 7-2003, particularly Section 3(e) thereof, provides to wit:

"SEC. 3.GUIDELINES IN DETERMINING WHETHER A

PARTICULAR REAL PROPERTY IS A CAPITAL ASSET OR

ORDINARY ASSET. -

XXX XXX XXX

e. Treatment of abandoned and idle real properties. -- Real properties

formerly forming part of the stock in trade of a taxpayer engaged in

the real estate business, or formerly being used in the trade or business

of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated

as ordinary assets. Real property initially acquired by a taxpayer

engaged in the real estate business shall not result in its conversion

into a capital asset even if the same is subsequently abandoned or

becomes idle.

Provided however, that properties classified as ordinary assets for

being used in business by a taxpayer engaged in business other than

real estate business as defined in Section 2(g) hereof are automatically

converted into capital assets upon showing of proof that the same have

VA1-0404-2020 JUL2 3 2U2U

not been used in business for more than two (2) years prior to the

consummation of the taxable transactions involving said properties.

(Emphasis supplied)

Based on the above, an idle property classified as ordinary asset is automatically

converted into capital asset upon showing of proof that the same has not been used in

business for more than two (2) years prior to the consummation of the taxable transaction

involving said properties. The automatic conversion of property into capital asset

provided in RR No. 7-2003, however, is not necessary when the idle real property is considered capital asset from the moment it was acquired.The subject real properties

assets. The properties were never used in the course of trade or business of Cleon, or certified by the City Assessor of Mandaluyong and Barangay Chairman of Vergara, Zone depreciated for that purposes. No improvements were introduced to the real properties as 26. More importantly, Cleon is not engaged in the real estate business, it did not operate from the time it was incorporated and thus, it has no income-generating activity. were acquired in 2017 for investment purposes and recorded/reported by Cleon as capital

the real estate business, being not a real estate dealer, developer or lessor and was organized as a holding company; that the aforementioned properties have been idle and vacant (for more than two years) as shown, aside from the pictures submitted, by the Certifications of the City Assessor In view of the foregoing, and considering that Cleon is a taxpayer not engaged in JEU Mandaluyong that there are no improvements erected on the land as well as the Certification of Barangay Chairman of Vergara, Zone 26 that the properties hav commercial activity; and that the properties have been treated in C0 ints and are reflected in the audited

financial statement not been used in the ordinary

course of trade or busines nion of this Office that the real properties described above are classified subiect to capital gains tax and documentar tal assets, the conveyance of which is BIR Ruling Nos. 187-2017 dated April 17, 2017; 634-2017 dated December 19, 2017 and 480-2017 dated October 18, 2017)

However, if upon investigation, it will be disclosed that the facts are different, then this This ruling is being issued on the basis of the foregoing facts as represented.

ruling shall be considered null and void.

Very truly yours,

auanna CAESAR R.DULAY

Commissioner of Internal Revenue

035916

gps (cleon holdings) K-1