BIR Ruling DA-11-08

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Copyright 2015 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2014 1

January 15, 2008

BIR RULING [DA-011-08]

Secs. 27 (D) (5) & 39 (A) (1);

DA-578-2007 dtd 11/07/07

Manalo Puno Jocson & Guerzon Law Office

5/F Valero Tower, 122 Valero Street

Salcedo Village, Makati City

Attention:Maria Rachel V. Riego De Dios

and

Jaypee Orlando C. Pedro

Gentlemen :

This refers to your letter dated December 18, 2007, requesting in behalf of

your client, Silverman Holdings, Inc. (Silverman, for short), a confirmation of your

opinion that the conveyance of Silverman of its parcel of land treated as its investment

is a capital asset and would therefore be subject to 6% capital gains tax.

It is represented that as stated in its Articles of Incorporation and current

Financial Statements, Silverman is a holding company; that it is engaged in the

business of investments of different kinds; that your client acquired the subject land as

an investment and subsequently entered into a Joint Venture Agreement on 05

September 2006 with Nuvoland Philippines, Inc. (Nuvoland, for short) so that the

subject land can be developed into a mixed-use high rise building (the "Project"); that

before any construction was undertaken, Silverman re-negotiated with Nuvoland that

it be paid wholly in cash as consideration for its conveyance of the subject land since

Silverman is not in the realty business; that a Supplemental Agreement was executedbetween the parties on October 9, 2007 wherein it was stated that Silverman, as the

landowner, shall convey and transfer ownership over the land to Nuvoland for

purposes of the Project; that as consideration for the subject land, Silverman shall be

paid in cash payable on installment basis; that since Silverman is a holding company,

not engaged in the real estate business, it is your opinion that the sale of land qualifies

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as a sale of capital asset subject to the 6% capital gains tax (CGT); that the CGT

would thus be based on the gross selling price or the current fair market value,

whichever is higher, as determined in accordance with Section 6 (E) of the Tax Code.

(Section 27 [D] (5), Tax Code); that since the initial payments in the first year of sale

will exceed 25% of the selling price, the sale shall be treated as a cash sale and the6% CGT will be due within 30 days from the execution of the deed of conveyance.

(Section 49 [B] (2), Tax Code; that in this case, the taxpayer is required to report the

gain on cash basis. Hence, your request. HaECDI

In reply thereto, please be informed that Section 27 (D) (5) of the Tax Code of

1997, as amended, as implemented by Revenue Regulations No. 7-2003, provides

(5) Capital Gains Realized from the Sale, Exchange or Disposition

of Lands and/or Buildings. A final tax of six percent (6%) is hereby

imposed on the gain presumed to have been realized on the sale, exchange ordisposition 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 this Code, whichever is higher, of such lands and/or buildings."

It is undisputed that the yardstick for determining whether the property is

capital asset or ordinary asset is the actual use of the said property. 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 classified as a capital asset. Moreover, if the property is merely held for investment

purposes and remains vacant and idle, it is deemed a capital asset. cCSTHA

This is fortified inBIR Ruling No. 014-2003 dated October 28, 2003 , where

this Office ruled that

"It is apparent under the foregoing provision that for a property to be

considered an ordinary 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 a capital asset. The property was neither held primarily

for sale to customers nor actually used in the business of Wendell HoldingsCo., Inc. . . . The property is not actually used in the business of Wendell

Holdings Co., Inc. as it has remained idle and undeveloped. Therefore, the sale

of the property under consideration is a sale of a 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."

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(2) subject to DST at the rate of P15.00 for each P1,000.00 or fractional

part thereof in excess of P1,000.00, or 1.5% of the consideration or fair

market value of the properties, whichever is higher, pursuant to Section

196 of the Tax Code of 1997, as amended; and

(3) exempt from 12% VAT, the property not being primarily held and

offered for sale or lease to customers in the ordinary course of

Silverman's trade or business, as provided under Section 109 (w) of the

Tax Code of 1997, as amended. (BIR Ruling No. DA-270-04 dated May

17, 2004) TCcIaA

This ruling is being issued on the basis of the foregoing facts as represented. If

upon investigation, however, it is disclosed that the facts are different, then this ruling

shall be considered null and void.

Very truly yours,

(SGD.) JAMES H. ROLDAN

Assistant Commissioner

Legal Service

Bureau of Internal Revenue

Documents

BIR Ruling DA-11-08