BIR Ruling No. 284-2022

REPUBLIC OF THE PHILIPPINES

DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE

Quezon City

Secs. 27(D)(5); and 39(A)(1) of the Tax Code of 1997, as amended RR No. 7-2003 BIR Ruling No. OT-102-2022 OT: 2 8 4 - 2 0 2Z iUN 6_2022

MOSVELDTT LAW OFFICES

Donia Julia Vargas cor. Meralco Ave. Ortigas Center, Pasig City, 1605 9/F One Corporate Center

Attention: Rodoifo G. Tuazon tr.

Gentlemen:

This refers to your letter, on behalf of your client, Permafrost Cold Storage. and Logistics Corporation ("Permafrost"), requesting for a confirmatory ruling on your opinion that the sale of its parcels of land is subject only to six percent. (6%) capital gains tax (CGT) as these are capital assets pursuant to Section 27 (D) (5) of the National Internal Revenue Code (Tax Code) of 1997, as amended.

It is represented that Permafrost is a stock corporaticn. registered with the Securities and Exchange Commission. It was organized on May 27, 2011 and was established to maintain, engage and/or carry on the business of operating a cold storage facitity. However, from the time of its organization, the company never commenced cemmercial operations and was not able to serve its purpose as stated in its.Articles of Incorpor ation. Currently, Permafrost owns two (2) parcels of land covered by T'ransfer Certificate of I'itle (TCT) Nos.

acquisition, have been recorded in the books of accounts aud were presented in Permafrost's and "subject pr(perties"). The subjec: properties, from the time of its

audited financial statements as non-turrent assets/long terni assets. As non-current assets/long term assets, the subject properties h ave remained undevel'ped, unimproved, idle and vacant since they were acquired as per Certificate of No-Improvement issued by the Office of the City Assessor of Taguig City as well as Crtifications issued by Barangay Ligid Tipas and Barangay Palingon-Tipas where the subject properties are located. Moreover, the subject properties have never been used by Permafrost in its trade or business, leased out and were never included in its stock in trade or inventory for sale to customers.

amended, states that: In reply, please be informed that Section 39 (A) (1) of the Tax Code of 1997, as

"SEC. 39. Capital Guins and Losses.

(A) Definitions. - A.: used in this Title --

by the taxpayer (whether or not connecied with his trade or (1) Capital Assets. --- The term 'capital asset$' means property held

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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 ctose of the taxable year or property held by the taxpayer primarily for sale to customers in the ordinary course of his irade 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 traie or business of the taxpayer. " (Emphasis and underscoring supplied)

In relation thereto, Section 2 of Revenue Regul:ations (RR) No. 7-20031 dated December 27, 2002, states that:

Regulations, the follovving terms shall be defined as follows. "SECTION 2. Definition of Terms. For purposes of these

a. Capital assets shall refer to all real properties held by a taxpayer. whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets under Sec. 39.(A) (1) of the Code.

b. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital asseis under Sec. 39 (A) (i) of the Code, namely:

1. Stock in trade of a taxpayer or other real property of a kind which hand at the close of the taxable year; or would properly be included in the inventory of the taxpayer if on

2. Real property held by the taxpaver primar?iy for sale to customers in the ordinary course of his trade or business; or

3. Real property used in trade or business 'i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34 (F) of the Code; or

4. Real property used in trade or business of the taxpayer.

XXX XXX X (Emphiasis and underscoring stipplied)

Under the above quoted provisions, it is undisputed: that the yardstick for determining

Thus, if the property is not actually used in trade or business of the taxpayer, whether or not connected with his trade or business, or not held for lease or sale to customers, it will be whether the property is capital assei or ordinary asset is tie actual use of the said property.

classified as a capital asset. Also, if the property is merely held for capital appreciation and investment purposes and remains vacant and'idle, it is deenied a capital asset.

In stressing the rationale of the above-mentioned ru!e, this Office elucidated the matter in BIR Ruling No. 014-2003 dated October 28, 2003, as foilows:

: Providing the Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an Ordinary. Asset Pursuant to Section 39 (A) (1) of the National Internal Revenue (ode of 1997 for Purposes of Imposing the Capital Gains Tax under Sections 24 (D), 25 (A) {3), 25 (B) and 27 (D) (5), or the Ordinary Income Tax under Sections 24 (A), 25 (A) & (B), 27 (A), 28 (A) (1) and 28 (B) (1); or the Minimum Corporate Income Tax (MCIT) under Sections 27 (E) and 28 (A) :2) of the Same Code.

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"It is apparent under the foregoing provision that for a property to be considered an ordlinary asset, it must be actually used in the business of the corporation. Accordingly, on the condition that Wendell Holdings Co., Inc. is not habitually engaged in the real estate business as represented, the property under consideration is capital asset. The property was neither hela primarily for sale to customers nor actually used in the business of Wendell Holdings Co., Inc. xxx The property is not actually used in the business of Wendell Holdings' Inc. as it has remained idle and undeveloped. Therefore, the sale of the properly under consideration is a sale of capital asset, not an ordinary asset. As such; the transaction is subject to capital gains tax of 6% under Section 27(D) (5) and not to the creditable withholding tax. "

In the instant case, Permafrost which is primordially engaged in the business of operating a cold storage facitity is not considered as a company habitually engaged in the real estate business. Where the taxpayer is not engaged in the ?al estate business, a property not forming part of its inventory is considered a capital asset.

Furthermore, Section 3 (e) of RR No. 7-2003 provides that:

"SECTION 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 reai estate business, or forirerly being used in the trade or business of a taxpaver 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 capito! 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 taxpaver 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 tot been used in business for more than two (2 vears prior to the consummation of the taxable transactions involving said properties. " (Emphasis and underscoring supplied)

In applying the above provision of RR No. 7-2003, feal properties owned by taxpayers not engaged* in the real estate business or referring to those persons other than real'estate dealers, real estate developers and/cr real estate lessors shall, upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving the said real properties. and though classified as ordinary assets, be automatically converted into capital assets.

In view cf the foregoing, and considering that Perniafrost is a taxpayer not engaged in the real estate business, being not a real estate dealer, developer or lessor and was organized as

and that the subject properties have been treated in the books of accounts and were reflected in the Permafrost's audited financial statement as non-current 'assets/long term assets and has not a cold storage facility; that the subject properties have been idle and vacant (for more than two years) per Certificate of No-Improvement issued by the Office of the City Assessor of Taguig City as well as Certifications issued by Barangay Ligid Tipas and Barangay Palingon-Tipas;

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that the subject properties describediabove are classified as capital assets. under Section 57 and value-added tax (VAT) under Section 106, both of the same Code. been used in the ordinary course of trade or business, it is the considered opinion of this Office 27 (D) (5) of the Tax Code of 1997, as amended, and documentary stamp tax (DST) under Section 196 of the same Code, and shall not be subject to creditable withholding tax (CWT) Thus, the conveyance of which through sale is subject only to the CGT under Section JUN 0 6 22

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

Very truly yours.

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K- : Commissioner of Internal Revenue CAESAR R. DULAY * 051733

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