BIR Ruling No. 522-2017

REPUBLIC OF THE PHILIPPINES

BUREAU OF INTERNAL REVENUE DEPARTMENT OF FINANCE

Quezon City

Crescent Park West, Bonifacio Global City OUISUMBING TORRES LAW OFFICES Ioth Floor, Net One Center 26:h Street, cor. 3rd Avenue Sec.27(D)(5);RR 2-98: RR 16-05 BIR Ruling No. 021-02 BIR Ruling No. 363-14 1522-2017 11-7-20 7

Taguig City

Attention: Atty. Dennis G. Dimagiba Atty. Kristine Anne V. Mercado-Tamayo and

Gentlemen:

This refers to your letter dated October 25. 201l, requesting on bchalf of your client, Estate of Ciriaco Tuason ("Estate"), for confirmation that the transfer of properties from C. Tuason e Hijos, Inc. to the judicial Administrator, Atty. Ramon J. Quisurmbing. is not subject to income tax either by way of creditable withholding tax (CWT) or capital gains tax (CGT), and that thc transfer is also not subject to value-added tax (VAT) and donor's tax.

No. 06-114796, pending before the Regional Trial Court of Manila, Branch 41. The Documents submitted show that the'Estate is the subject of Special Proceeding

Estate is represented by its duly appointed judicial Administrator, Atty. Ramon J. Quisumbing.

On January 24, 2011. the Estate filed a Petition (Petition") for Liquidation of C. Tuason e Hijos, Inc. ("CTHI") with the Regional Trial Court of Manila, Branch 24 ("Court").

CTHI was incorporated in 1934 as a family or closely held corporation, with its principal place of business at l174 Agno Street, Maiate: Manila. CTHI had a corporate term of fifty (50) years from 1934. Thus, its corporate term expired in 1984 or 26 years ago. In view of the expiration of the corporate term of CTHI and/or the dissolution of CTHI, the Estate, as the 100% beneficial stockholder of CTHI, filed the Petition for the liquidation of the remaining assets of CTHI for the interest of and eventua! distribution to its stockholder, in order to fully settle and finally close all of CTHI's corporate affairs

its obligations and distributing its remaining assets. Liquidator of CTHI for the purposes of' liquidating CTHI's remaining properties, settling The Estate also prayed that Atty. Ramon J. Quisunbing be appointed as

Petition. as follows: In a decision rendered on June 6, 2011 ("Decision'), the Court resolved the

(1) CTHI is declared dissolved: (2) Atty: Quisumbing of Quisumbing Torres Law Office is appointed the' liquidator of CTHI: (3) Title of the assets/properties of CTHI is directed transferred to the liquidator for the benefit of CTHI's stockholders, creditors, and others in interest; and (4) Atty. Quisumbing is directed to make guarterly report on the liquidation.

In support of your request, you attached copies of the following documents: I. Petition for Liquidation of C. Tuason e Hijos, Inc. dated January i2, 201i filed with the Court on January 24, 2011 and all annexes attached thereto; and

The Court's Decision dated June 6. 201l, directing the transfer of title of the assets/properties of CTHI to the liquidator for the benefit of'CTHI's stockholders, creditors, and others in interest..

In reply, please be informed as follows:

tax 1. The transfer of the assets/properties to the liquidator is not subject to income

business of a corporation and are treated as capital assets, based on the gross selling price Whichever is higher, of such lands and/or buildings. exchange or disposition of lands and/or buildings which are not actually used in the percent (6%) is imposed on the gains presumed to have been realized on the sale, or fair market value as determined in accordance with Section 6(E) of the Tax Code, Under Section 27 (D) (5) of the Tax Code of 1997 (Tax Code"). a final tax of six

than capital asset, shall be imposed upon the withholding agent/buyer, in accordance with higher, paid to the seller/owner for the sale, transfer or exchange of real property, other 2.57.2(J) of Revenue Regulations No. 2-98, as amended, provides that a creditabie withhoiding tax based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is a prescribed schedule. On the other hand, in case of real property other than capital asset. Section

beneficial ownership of the properties.The transfer of beneficial ownership In order for income to accrue, there must be a transfer by the corporation of

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indispensabte for the imposition of any capital gains on the corporation as a result of the transfer.

to be creuted pursuant to the Decision ordering the transfer of the assets/properties of clear that the transfer of the aforesaid properties in favor of the liquidator and for the benefit of CTHI's stockholders. creditors, and others in interest, will not be subject to capital gains tax imposed under Section 27 (D) (5) of the Tax Code nor to the expanded CTHI to the liquidator. with no monetary consideration involved for such transfer, it is withhotding tax prescribed in Revenue Regulations No. 2-98, as amended. (BIR Ruling In the instant case, because there is no transfer of ownership. but rather, u trust is.

No. 021-02 daled May 31. 2002)

Article 1453 of the New Civil Code provides, to wit

there is an implied trust in favor of the person whose benefit is contemplated. declared intention to hold it for. or transfer it to another or the grantor, -When property is conveyed to a person in reliance upon his

transfer of titfe of the assets/properties of CTHI to the'liquidator for the benefit of C'THI's Thus, an implied trust was created by virtue of the Court's Decision directing the

stockholders, creditors, and others in interest.

Added Tax. 2. The transfer of the assets/properties to the liquidator is not subject to Value-

properties in the Philippines in the course of trade or business. The Tax Code imposes Value-Added Tax ("VAT") on the sale ot goods or The term "goods or properties" refers to all tangible and intangible objects which are capabie of pecuniary estimation.

VAT is imposed where the transfer of properties is made in the course of business.

Where the transfer is pursuant to a court decision ordering the transfer of title of assets/properties to a liquidator for the benefit of the transferor's stockhoiders. creditors. and others in interest, in relation to a liquidation proceeding, the transfer is clearly not made in the course of business and thus shouid not be subject to VAT. This Office citing Revenue Regulations (RR) No. 16-05, as amended, has ruled that transmission oi property to the liquidator of a company: as trustee, shall not be subject to VAT. as the property will be merely held in trust for the company's unsecured creditors. (BIR Ruling No. 021-02 dated 31 May 2002 Section 4.106-3 of RR No. 16-05 provides, as follows:

"SEC. 4.106-3. Sale of Real Properties.

XXX XXX XXX** S

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completed gift, the transfer is subject to VAT as a deemed sale transaction pursuant to Sec. 4.106-7(a)(1) of these Regulations. The transfer is a completed gift if the transferor divests himself absolutely of control over the property, i.e., designation of beneficiary. However, if the property transferred is one for sale, lease or use in the ordinary course "of trade or business and the transfer constitutes a Transmission of property to a trustee shall not be subiect to VAT if the propcrty is to be merely held in trust for thc trustor and/or beneficiary irrevocable transfer of corpus and/or irrevocable

3 The transfer of the assets/properties to the liquidator is not subject to Donor's Tax.

.indirect, and whether the property is real or personal, tangible or intangible. transfer by any person, resident or non-resident. of property by gift. Thc donor's tax applies, whether such transfer is in trust or otherwise, whether the gift is direct or Under Section 98 of the Tax Code. a donor's tax is generally imposed on thie

is indispensable. In order that donor's tax will acerue in a direct gift. the element of donarive intent

CTHl was motivated by any donative intent in transferring and contributing the properties to the liquidator. rather. pursuant to a Court Order in relation to CTHI's liquidation. It cannot be said that In the instant case, the transfer by CTHI is without monetary consideration but is.

on the transfer of the properties to the liquidator in the absence of any donative intent. Based on these facts, it is evident that CTHI cannot be held liable for donor's tax

to the VAT, if applicable, as well as to the documentary stamp tax under Section 196 of the Tax Code of 1997, as amended. any creditor or any person in the future. the deed of transfer to be executed by the Liquidator will be subject to the capital gains tax or withholding tax as the case may be. However, should the Liquidator, as trustee, sell or convey such property either to

4. Applicable taxes in case of transfer of the assets/properties to the --'stockholders by CHTI/Liquidator

a. Income Tax

The second paragraph of Section 73 (A) of the Tax Code of 1997 states:

liquidation or dissoiution, the gain realized or loss sustained by income or a deductible loss, as the case may be." the stockholder, whether individual or corporate, is a taxable "Where a corporation distributes all of its assets in complete

Moreover, Section 8 of Revenue Regutations (RR) No. 6-2008, states:

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of the shares in exchange for cash and property distributed by the assets and liabilities. the investor shall recognize either capital comparing the cash and fair market value of property 'received between the sum of the cash and the fair market value of property the capital gain or capital loss from the investment, whichever is Dissolution of the Corporation and Liquidation of Assets and issuing corporation upon its dissolution and liquidation of all against the cost of the investment in shares. applicable. If the investor is an individual, the rule on holding period shall apply and the percentage of taxable capital gain or deductible capitai ioss shall'depend on the number of months or years the shares are held by the investor. Scction 39 of the Tax Code. as amended. shall herein apply in all possible situations. Liabilities of Said Corporation. gain or capital loss upon such surrender of shares computed by received and the cost of the investment in shares shall represent SEC.8. Taxation of Surrender of Shares by the Investor upon Upon surrender by the investor The difference

amended. on individual taxpayers or to the corporate income tax the regular income tax rates imposed under the Tax Code, as rate, in case of corporations.' The capital gain or loss derived therefrom shail be subject to

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 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. (BIR Ruling No. 363-14 dated September 22. 201) than the amount/value of investment, the gain realized by a stockholder from the June 30. 1947) Nonetheless, this Office has held that the liquidating gain. which is the Thus, in the event that the tiquidating dividend in the form of properties is more

shares and the fair market value of the properties givcn as liquidating dividend to the stockholders shall be 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 differencc between the adjusted cost of the

b Documentary Stamp Tax (DST)

Documentary Stamp Tax Regulations provides, viz.: Section 189 of Revenue Regulations No. 26, otherwvise known as the

"Section 189. capital. --- A conveyance of real estate by a corporation without valuable consideration to an owner of all its capital stock in consequencc of is dissolution is not subject to tax." Conveyances by corporation to owner of all the

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corporation to its stockholders in liquidation of the business without consideration is Pursuant to the above-quoted provision, the distribution of the assets of the

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 the corporation to the stockholders of the properties shall not be subject to DST imposed under said Section 196 of the Tax Code. as amcnded. The notarial certification on the deed of transfer is, however. subject to the DS'T of P15.00 imposed under Section 188 of the same Tax Code. (BIR Ruling No. 363-14 dated September 22. 201+)

C. Valued-Added Tax

.provides that: Pursuant to Section 106 (B) (4) of the Tax Code of 1997. as amended, which

Properties. Section 106. XXX transactions shall be deemed sale: B (4) Retirement from or cessation of business, with respect to inventories of taxabie goods existing retirement and cessation. XXX Transactions Value-Added XXX XXX Deemed Tax on XXX Sale. XXX Sate of Goods or The as of such following

tiquidating dividends w ill fall under the purview of the above-quoted provision and shall be subject to the 12% Value-Added Tax. Hence, the conveyance of the properties by CTHI to the stockholders as

Finally. the stockholders who shall sell the real property received by them as liquidating dividends immediately after title thereto is transferred to their name shall he subject to the final capital gains tax imposed under Section 24 (D) (1) of the Tax Code, as amended, in the case of individual stockholders/distributees, and Section 27 (D) (5) thereof. in the case of corporate stockholders/distributees. (RIR Ruling No. 363-14 daled September 22. 2014

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 as null and void.

Very truly yours.

aoMy

K-1 GPS-JHB Conmissioner of Internal Reveue CAESAR R. DULAY 1 010977