November 7, 2017

BIR RULING NO. 522-17

Sec. 27 (D) (5); RR 2-98; RR 16-05;

BIR Ruling No. 021-02; BIR Ruling
No. 363-14

Quisumbing Torres Law Offices

12th Floor, Net One Center
26th Street, cor. 3rd Avenue
Crescent Park West, Bonifacio Global City
Taguig City

Attention: Atty. Dennis G. Dimagiba

and
Atty. Kristine Anne V. Mercado-Tamayo

Gentlemen :

This refers to your letter dated October 25, 2011, requesting on behalf 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.
Quisumbing, is not subject to income tax either by way of creditable withholding tax
(CWT) or capital gains tax (CGT), and that the transfer is also not subject to
value-added tax (VAT) and donor's tax.

Documents submitted show that the Estate is the subject of Special Proceeding
No. 06-114796, pending before the Regional Trial Court of Manila, Branch 41. The
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 1174 Agno Street, Malate, Manila. CTHI had a

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 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
eventual distribution to its stockholder, in order to fully settle and finally close all of
CTHI's corporate affairs.

The Estate also prayed that Atty. Ramon J. Quisumbing be appointed as

Liquidator of CTHI for the purposes of liquidating CTHI's remaining properties,
settling its obligations and distributing its remaining assets.

In a decision rendered on June 6, 2011 ("Decision"), the Court resolved the

Petition, as follows:

(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 quarterly report on the

liquidation.

In support of your request, you attached copies of the following documents:

1. Petition for Liquidation of C. Tuason e Hijos, Inc. dated January

12, 2011 filed with the Court on January 24, 2011 and all annexes
attached thereto; and

2. The Court's Decision dated June 6, 2011, 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:

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

income tax.

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

On the other hand, in case of real property other than capital asset, Section
2.57.2 (J) of Revenue Regulations No. 2-98, as amended, provides that a creditable
withholding 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 higher, paid to the seller/owner for the sale, transfer or exchange of real property,
other than capital asset, shall be imposed upon the withholding agent/buyer, in
accordance with a prescribed schedule.

In order for income to accrue, there must be a transfer by the corporation of

beneficial ownership of the properties. The transfer of beneficial ownership is
indispensable for the imposition of any capital gains on the corporation as a result of
the transfer.

In the instant case, because there is no transfer of ownership, but rather, a trust
is to be created pursuant to the Decision ordering the transfer of the assets/properties
of CTHI to the liquidator, with no monetary consideration involved for such transfer,
it is 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 withholding tax prescribed in Revenue Regulations No. 2-98, as amended.
(BIR Ruling No. 021-02 dated May 31, 2002)

Article 1453 of the New Civil Code provides, to wit:

"When property is conveyed to a person in reliance upon his declared

intention to hold it for, or transfer it to another or the grantor, there is an implied
trust in favor of the person whose benefit is contemplated."

Thus, an implied trust was created by virtue of the Court's Decision 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.

2. The transfer of the assets/properties to the liquidator is not subject to

Value-Added Tax.

The Tax Code imposes Value-Added Tax ("VAT") on the sale of goods or
properties in the Philippines in the course of trade or business. The term "goods or
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 properties" refers to all tangible and intangible objects which are capable 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 stockholders,
creditors, and others in interest, in relation to a liquidation proceeding, the transfer is
clearly not made in the course of business and thus should not be subject to VAT.
This Office, citing Revenue Regulations (RR) No. 16-05, as amended, has ruled that
transmission of 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

Transmission of property to a trustee shall not be subject to VAT if the property

is to be merely held in trust for the trustor and/or 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 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., irrevocable transfer of corpus and/or
irrevocable designation of beneficiary."

3. The transfer of the assets/properties to the liquidator is not subject to

Donor's Tax.

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

In order that donor's tax will accrue in a direct gift, the element of donative
intent is indispensable.

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

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

However, should the Liquidator, as trustee, sell or convey such property either
to 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, to the VAT, if applicable, as well as to the documentary stamp tax under Section
196 of the Tax Code of 1997, as amended.

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:

"Where a corporation distributes all of its assets in complete liquidation or

dissolution, the gain realized or loss sustained by the stockholder, whether
individual or corporate, is a taxable income or a deductible loss, as the case may
be."

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

SEC. 8. Taxation of Surrender of Shares by the Investor upon Dissolution

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

The capital gain or loss derived therefrom shall be subject to the regular
income tax rates imposed under the Tax Code, as amended, on individual

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 taxpayers or to the corporate income tax rate, in case of corporations."

Thus, in the event that the liquidating dividend in the form of properties is
more than the amount/value of investment, the gain realized by a stockholder from the
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 June 30, 1947) Nonetheless, this Office has held that the liquidating gain,
which is the 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, 2014)

Accordingly, the gain which is the difference between the adjusted cost of the
shares and the fair market value of the properties given 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.

b. Documentary Stamp Tax (DST)

Section 189 of Revenue Regulations No. 26, otherwise known as the

Documentary Stamp Tax Regulations provides, viz.:

"Section 189. Conveyances by corporation to owner of all the capital. —

A conveyance of real estate by a corporation without valuable consideration to
an owner of all its capital stock in consequence of its dissolution is not subject
to tax."

Pursuant to the above-quoted provision, the distribution of the assets of the

corporation to its stockholders in liquidation of the business without consideration is
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 amended. The notarial
certification on the deed of transfer is, however, subject to the DST of P15.00
imposed under Section 188 of the same Tax Code. (BIR Ruling No. 363-14 dated
September 22, 2014)

c. Value-Added Tax

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

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 provides that:

"Section 106. Value-Added Tax on Sale of Goods or Properties.

—

xxx xxx xxx

(B) Transactions Deemed Sale. — The following transactions shall be

deemed sale:

xxx xxx xxx

(4) Retirement from or cessation of business, with respect to

inventories of taxable goods existing as of such retirement and
cessation."

Hence, the conveyance of the properties by CTHI to the stockholders as

liquidating dividends will fall under the purview of the above-quoted provision and
shall be subject to the 12% Value-Added Tax.

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
be 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. (BIR Ruling No.
363-14 dated 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,

(SGD.) CAESAR R. DULAY

Commissioner of Internal Revenue

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