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December 27, 2002

REVENUE REGULATIONS NO. 07-03

SUBJECT : 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 Code 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

TO : All Internal Revenue Officials and Others Concerned

SECTION 1. Scope. — Pursuant to Section 244 of the National Internal Revenue Code of 1997
(Code), these Regulations are hereby promulgated to implement Sec. 39(A)(1) , in relation to Secs. 24(D)
, 25(A)(3) , 25(B) and 27(D)(5) , and Secs. 24(A) , 25(A) & (B), 27(A) or 27(E) , 28(A)(1) or 28(A)(2) ,
and 28(B)(1) , all of the said Code, providing for the purpose the guidelines in determining whether a
particular real property is a capital asset or an ordinary asset.

SECTION 2. Definition of Terms. — For purposes of these Regulations, the following terms shall be
defined as follows:
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
assets under Sec. 39(A)(1) of the Code, namely:
1. Stock in trade of a taxpayer or other real 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
2. Real property held by the taxpayer primarily 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.
Real properties acquired by banks through foreclosure sales are considered as their ordinary assets.
However, banks shall not be considered as habitually engaged in the real estate business for purposes of
determining the applicable rate of withholding tax imposed under Sec. 2.57.2(J) of Revenue Regulations
No. 2-98 , as amended.
c. Real property shall have the same meaning attributed to that term under Article 415 of Republic
Act No. 386, otherwise known as the "Civil Code of the Philippines."
d. Real estate dealer shall refer to any person engaged in the business of buying and selling or
exchanging real properties on his own account as a principal and holding himself out as a full or part-time
dealer in real estate.
e. Real estate developer shall refer to any person engaged in the business of developing real
properties into subdivisions, or building houses on subdivided lots, or constructing residential or
commercial units, townhouses and other similar units for his own account and offering them for sale or
lease.
f. Real estate lessor shall refer to any person engaged in the business of leasing or renting real
properties on his own account as a principal and holding himself out as lessor of real properties being
rented out or offered for rent.
g. Taxpayers engaged in the real estate business shall refer collectively to real estate dealers, real
estate developers, and/or real estate lessors. Conversely, the term "taxpayers not engaged in the real
estate business" shall refer to persons other than real estate dealers, real estate developers and/or real
estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of
Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to
be engaged in the real estate business for purposes of these Regulations.
SECTION 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or
Ordinary Asset. —
a. Taxpayers engaged in the real estate business. — Real property shall be classified with respect
to taxpayers engaged in the real estate business as follows:
1. Real Estate Dealer. — All real properties acquired by the real estate dealer shall be considered
as ordinary assets.
2. Real estate Developer. — All real properties acquired by the real estate developer, whether
developed or undeveloped as of the time of acquisition, and all real properties which are field by the real
estate developer primarily for sale or for lease to customers in the ordinary course of his trade or business
or which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable
year and all real properties used in the trade or business, whether in the form of land, building, or other
improvements, shall be considered as ordinary assets.
3. Real Estate Lessor. — All real properties of the real estate lessor, whether land and/or
improvements, which are for lease/rent or being offered for lease/rent, or otherwise for use or being used
in the trade or business shall likewise be considered as ordinary assets.
4. Taxpayers habitually engaged in the real estate business. — All real properties acquired in the
course of trade or business by a taxpayer habitually engaged in the sale of real estate shall be considered
as ordinary assets. Registration with the HLURB or HUDCC as a real estate dealer or developer shall be
sufficient for a taxpayer to be considered as habitually engaged in the sale of real estate. If the taxpayer is
not registered with the HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be
deemed to be engaged in the real estate business through the establishment of substantial relevant
evidence (such as consummation during the preceding year of at least six (6) taxable real estate sale
transactions, regardless of amount; registration as habitually engaged in real estate business with the
Local Government Unit or the Bureau of Internal Revenue, etc.).
A property purchased for future use in the business, even though this purpose is later thwarted by
circumstances beyond the taxpayer's control, does not lose its character as an ordinary asset. Nor does a
mere discontinuance of the active use of the property change its character previously established as a
business property.
b. Taxpayer not engaged in the real estate business. — In the case of a taxpayer not engaged in the
real estate business, real properties, whether land, building, or other improvements, which are used or
being used or have been previously used in the trade or business of the taxpayer shall be considered as
ordinary assets. These include buildings and/or improvements subject to depreciation and lands used in
the trade or business of the taxpayer.
A depreciable asset does not lose its character as an ordinary asset, for purposes of the instant provision,
even if it becomes fully depreciated, or there is failure to take depreciation during the period of ownership.
Monetary consideration or the presence or absence of profit in the operation of the property is not
significant in the characterization of the property. So long as the property is or has been used for business
purposes, whether for the benefit of the owner or any of its members or stockholders, it shall still be
considered as an ordinary asset. Real property used by an exempt corporation in its exempt operations,
such as a corporation included in the enumeration of Section 30 of the Code, shall not be considered
used for business purposes, and therefore, considered as capital asset under these Regulations.
Real property, whether single detached; townhouse; or condominium unit, not used in trade or business
as evidenced by a certification from the Barangay Chairman or from the head of administration, in case of
condominium unit, townhouse or apartment, and as validated from the existing available records of the
Bureau of Internal Revenue, owned by an individual engaged in business, shall be treated as capital
asset.
c. Taxpayers changing business from real estate business to non-real estate business. — In the
case of a taxpayer who changed its real estate business to a non-real estate business, or who amended
its Articles of Incorporation from a real estate business to a non-real estate business, such as a holding
company, manufacturing company, trading company, etc., the change of business or amendment of the
primary purpose of the business shall not result in the re-classification of real property held by it from
ordinary asset to capital asset. For purposes of issuing the certificate authorizing registration (CAR) or tax
clearance certificate (TCL), as the case may be, the appropriate officer of the BIR shall at all times
determine whether a corporation purporting to be not engaged in the real estate business has at any time
amended its primary purpose from a real estate business to a non-real estate business.
d. Taxpayers originally registered to be engaged in the real estate business but failed to
subsequently operate. — In the case of subsequent non-operation by taxpayers originally registered to be
engaged in the real estate business, all real properties originally acquired by it shall continue to be treated
as ordinary assets.
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 not been used in business for
more than two (2) years prior to the consummation of the taxable transactions involving said properties.
f. Treatment of real properties that have been transferred to a buyer/transferee, whether the
transfer is through sale, barter or exchange, inheritance, donation or declaration of property dividends.
Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change
their character in the hands of the buyer/transferee. The classification of such property in the hands of the
buyer/transferee shall be determined in accordance with the following rules:
1. Real property transferred through succession or donation to the heir or donee who is not engaged
in the real estate business with respect to the real property inherited or donated, and who does not
subsequently use such property in trade or business, shall be considered as a capital asset in the hands
of the heir or donee.
2. Real property received as dividend by the stockholders who are not engaged in the real estate
business and who do not subsequently use such real property in trade or business shall be treated as
capital assets in the hands of the recipients even if the corporation which declared the real property
dividend is engaged in real estate business.
3. The real property received in an exchange shall be treated as ordinary asset in the hands of the
transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a
taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate
business, will use in business the property received in the exchange.
g. Treatment of real property subject of involuntary transfer. — In the case of involuntary transfers of
real properties, including expropriation or foreclosure sale, the involuntariness of such sale shall have no
effect on the classification of such real property in the hands of the involuntary seller, either as capital
asset or ordinary asset, as the case may be.
For example, real properties forming part of the inventory of a real estate dealer, which are foreclosed,
shall, for purposes of determining the applicable tax on such foreclosure sale, be treated as ordinary
assets. On the other hand, the nature of such real property in the hands of the foreclosure buyer shall be
determined in accordance with the rules stated in sub-paragraph (f) hereof.

SECTION 4. Applicable Taxes on Sale, Exchange or Other Disposition of Real Property. —


Gains/Income derived from sale, exchange, or other disposition of real properties shall, unless otherwise
exempt, be subject to applicable taxes imposed under the Code, depending on whether the subject
properties are classified as capital assets or ordinary assets.
a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident
aliens engaged in trade or business in the Philippines.
(i) Capital gains presumed to have been realized from the sale, exchange, or other disposition of
real property located in the Philippines, classified as capital assets, shall be subject to the six percent
(6%) capital gains tax imposed under Sec. 24(D)(1) or 25(A)(3) of the Code, as the case may be, based
on the gross selling price or current fair market value as determined in accordance with Sec. 6(E) of the
Code, whichever is higher, provided, that if the buyer is the Government or any of its political subdivisions
or agencies or a government-owned-or-controlled corporation, the tax liability shall, at the option of the
individual seller (including estate or trust), be computed on the basis of either the six percent (6%) capital
gains tax under Sec. 24(D)(1)/25(A)(3) or the graduated tax rates under Sec. 24(A)(1)(c) or 25(A)(1) , all
of the Code.
(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject
to the creditable withholding tax (expanded) under Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as amended,
based on the gross selling price or current fair market value as determined in accordance with Section
6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax imposed under Sec.
24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.
b. In the case of non-resident aliens not engaged in trade or business in the Philippines. — Capital
gains presumed to have been realized by non-resident aliens not engaged in trade or business in the
Philippines on the sale of real property located in the Philippines shall be subject to the six percent (6%)
capital gains tax imposed under Sec. 25(B), in relation to Sec. 24(D)(1), of the Code, based on the gross
selling price or current fair market value as determined in accordance with Sec. 6(E) of the Code,
whichever is higher.
c. In the case of domestic corporations. —
(i) Capital gains presumed to have been realized from the sale, exchange or disposition of lands
and/or buildings located in the Philippines, which are classified as capital assets, shall be subject to a
capital gains tax of six percent (6%) based on the gross selling price or current fair market value as
determined in accordance with Sec. 6(E) of the Code, whichever is higher, of such land and/or buildings
pursuant to Sec. 27(D)(5) of the Code.
(ii) The sale of land and/or building classified as ordinary asset and other real property (other than
land and/or building treated as capital asset), regardless of the classification thereof, all of which are
located in the Philippines, shall be subject to the creditable withholding tax (expanded) under Sec.
2.57.2(J) of Rev. Regs. No. 2-98, as amended, and consequently, to the ordinary income tax under Sec.
27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become
subject to the minimum corporate income tax (MCIT) under Sec. 27(E) of the Code, whichever is
applicable.
d. In the case of resident foreign corporations. — Real property located in the Philippines,
regardless of classification, sold by a resident foreign corporation shall be subject to the creditable
withholding tax (expanded) under Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as amended, and consequently,
to the ordinary income tax under Sec. 28(A)(1) or to the MCIT under Sec. 28(A)(2), both of the Code,
whichever is applicable.
e. In the case of non-resident foreign corporations. — The gain from the sale of real property located
in the Philippines by a non-resident foreign corporation shall be subject to the final withholding tax at the
rate of thirty-two percent (32%) imposed under Sec. 2.57.1(I) of Rev. Regs. No. 2-98, as amended, in
relation to Sec. 28(B)(1) of the Code.
f. Income on sale of real property not located in the Philippines. — Gain realized from the sale,
exchange, or other disposition of real property not located in the Philippines, regardless of classification,
by resident citizens or domestic corporations shall be subject to the income tax imposed in Sec. 24(A)(1),
or Sec. 27(A) or (E) of the Code, as the case may be. Such income/gain shall be exempt pursuant to Sec.
23(B) , (D) and (F) of the Code, as the case may be, in the case of non-resident citizens, alien
individuals and foreign corporations,

SECTION 5. Repealing Clause. — All existing BIR rulings, revenue rules, regulations and other
issuances or portions thereof inconsistent with the provisions of these regulations are hereby modified,
repealed or revoked accordingly.

SECTION 6. Effectivity. — These Regulations shall take effect after fifteen (15) days following
publication in the Official Gazette or in any newspaper of general circulation.

(SGD.) JOSE ISIDRO N. CAMACHO


Secretary of Finance

Recommending Approval:
(SGD.) GUILLERMO L. PARAYNO, JR.
Commissioner of Internal Revenue

REVENUE REGULATIONS NO. 18-01


SUBJECT : Guidelines on the Monitoring of the Basis of Property Transferred and Shares
Received, Pursuant to a Tax-Free Exchange of Property for Shares under Section 40(C)(2) of the
National Internal Revenue Code of 1997, Prescribing the Penalties for Failure to Comply with such
Guidelines, and Authorizing the Imposition of Fees for the Monitoring Thereof.

TO : All Internal Revenue Officers and Others Concerned.

SECTION 1. Scope. — Pursuant to Section 244 , in relation to Sections 40(C)(2) , 58(E) , 269 , and
275 of the National Internal Revenue Code of 1997 (Tax Code of 1997), these Regulations are hereby
promulgated for the purpose of providing the guidelines in the proper monitoring of the basis of properties
transferred, and shares received, pursuant to a tax-free exchange under Section 40(C)(2) of the Tax
Code of 1997, and to establish the policies governing the imposition of fees for the monitoring thereof.

SECTION 2. Basis. — A. Substituted Basis of Stock or Securities Received by the Transferor. — The
substituted basis of the stock or securities received by the transferor on a tax-free exchange shall be as
follows:
1. The original basis of the property, stock or securities to be transferred;
2. Less: (a) money received, if any, and (b) the fair market value of the other property received, if
any;
3. Plus: (a) the amount treated as dividend of the shareholder, if any, and (b) the amount of any gain
that was recognized on the exchange, if any.
However, the property received as 'boot' shall have as basis its fair market value. The term "boot" refers
to the money received and other property received in excess of the stock or securities received by the
transferor on a tax-free exchange.
If the transferee of property assumes, as part of the consideration to the transferor, a liability of the
transferor or acquires from the latter property subject to a liability, such assumption or acquisition (in the
amount of the liability) shall, for purposes of computing the substituted basis, be treated as money
received by the transferor on the exchange.
Finally, if the transferor receives several kinds of stock or securities, the Commissioner is authorized to
allocate the basis among the several classes of stocks or securities.
B. Substituted Basis of the Transferred Property in the Hands of the Transferee. The substituted
basis of the property transferred in the hands of the transferee shall be as follows:
(a) the original basis in the hands of the transferor;
(b) Plus: the amount of the gain recognized to the transferor on the transfer.
C. The Original Basis of Property to be Transferred. The original basis of the property to be
transferred shall be the following, as may be appropriate:
(a) The cost of the property, if acquired by purchase on or after March 1, 1913;
(b) The fair market price or value as of the moment of death of the decedent, if acquired by
inheritance;
(c) The basis in the hands of the donor or the last preceding owner by whom the property was not
acquired by gift, if the property was acquired by donation.
If the basis, however, is greater than the fair market value of the property at the time of donation, then, for
purposes of determining loss, the basis shall be such fair market value; or,
(d) The amount paid by the transferee for the property, if the property was acquired for less than an
adequate consideration in money or money's worth.
(e) The adjusted basis of (a) to (d) above, if the acquisition cost of the property is increased by the
amount of improvements that materially add to the value of the property or appreciably prolong its life less
accumulated depreciation.
(f) The substituted basis, if the property was acquired in a previous tax-free exchange under Section
40(C)(2) of the Tax Code of 1997.
D. Basis for Determining Gain or Loss on a Subsequent Sale or Disposition of Property Subject of
the Tax-free Exchange.
The substituted basis as defined in Section 40(C)(5) of the Tax Code of 1997, and implemented in
Section 2.A and 2.B above, shall be the basis for determining gain or loss on a subsequent sale or
disposition of property subject of the tax-free exchange. ]
SECTION 3. Submission of Information on the Basis of Properties. — The parties to a tax-free
exchange of property for shares under Section 40(C)(2) of the Tax Code of 1997 who are applying for
confirmation that the transaction is indeed a tax-free exchange shall, together with such information as
the Commissioner of Internal Revenue may require, submit the following:
(a) A sworn certification on the basis of the property to be transferred pursuant to such exchange.
The basis of each real property/share of stock or other property transferred must be itemized in the
certification in order to enable the BIR to determine the basis for subsequent disposition and to make it
possible for the Register of Deeds or the corporate secretary, as the case may be, to annotate the
information on such basis for each property/share of stock on the reverse side of the Transfer Certificate
of Title/Condominium Certificate of Title of the real property involved, or of Certificate of Stock. The sworn
declaration must be executed by the transferor himself, or in case the transferor is a juridical entity, by an
official with rank of no less than the Chief Financial Officer or his equivalent. The Commissioner of
Internal Revenue is authorized to prescribe the form in which such sworn declaration shall appear.
(b) Certified true copies of the Transfer Certificates of Title and/or Condominium Certificates of Title
of the real properties to be transferred;
(c) Certified true copies of the corresponding latest Tax Declaration of the real properties to be
transferred. It is understood that any improvement is separately declared and therefore, covered by a Tax
Declaration distinct from the Tax Declaration on the land. Further, if the tax declaration was issued three
(3) or more years prior to the exchange transaction, the Transferor shall include in the certification by the
local government unit's Assessor that such tax declaration is the latest tax declaration covering the real
property;
(d) Certified true copies of the certificates of stocks evidencing shares of stock to be transferred; and
(e) Certified true copy of the inventory of other property/ies to be transferred.
No certification/ruling will be issued by the Bureau of Internal Revenue unless the foregoing requirements,
in addition to such other documents that the Commissioner of Internal Revenue may require, are
submitted.

SECTION 4. Information to be Contained in Certification/Ruling by the Bureau of Internal Revenue. —


All certifications or rulings issued by the Bureau of Internal Revenue confirming that an exchange of
property for shares complies with the provisions of Section 40(C)(2) of the Tax Code of 1997 shall include
a statement on the substituted basis of the property transferred.

SECTION 5. Conditions for the Issuance of Certificate Authorizing Registration (CAR) or Tax
Clearance (TCL). — The CAR/TCL for the real property or share of stock/unit of participation/interest
involved in the exchange shall be issued by the Revenue District Officer/Authorized Internal Revenue
Officer on the basis of the certification or ruling to be issued in triplicate by the Commissioner or his duly
authorized representative to the effect that the transaction qualifies as a tax-free exchange under Section
40(C)(2) of the Tax Code of 1997.
The CAR/TCL to be issued shall specify, among others, that the transaction involved is a tax-free
exchange under Section 40(C)(2) of the Tax Code of 1997; the date of exchange; and the substituted
basis of the properties as stated in the certification or ruling issued by the Bureau of Internal Revenue.

SECTION 6. Information to be annotated in the Transfer Certificate of Title or Condominium Certificate


of Title issued by the Register of Deeds, and on the Certificate of Stock/Units of Participation issued by
the Corporate Secretary. — In cases of transfers or exchanges falling under Section 40(C)(2) of the Tax
Code of 1997, the following information shall be annotated on the reverse side of the Transfer Certificate
of Title or Condominium Certificate of Title or certificate of stock that is transferred or issued pursuant to
such transfer or exchange:
"The acquisition of the property described in this title/certificate is by virtue of a tax-free exchange
pursuant to Section 40(C)(2) of the National Internal Revenue Code of 1997 per Deed of
Exchange/Assignment dated __________. The substituted basis pursuant to Section 40(C)(5) of the
National Internal Revenue Code of 1997 is in the amount of ________________."
The following persons shall be responsible for making the above annotation:
(a) The Registrar of Deeds, with respect to the Transfer Certificate of Title or Condominium
Certificate of Title of real property that is transferred;
(b) The Corporate Secretary or equivalent officer of the investee corporation/partnership whose
shares/units are transferred by the Transferor to the transferee/surviving/consolidated corporation;
(c) The Corporate Secretary of transferee/surviving/consolidated corporation, upon the issuance of
the certificates of stock evidencing the original shares issued pursuant to the transfer or exchange.
The annotation shall be made on the reverse side of the Transfer Certificate of Title or Condominium
Certificate of Title, or certificate of stock/unit of participation, as the case may be.
In addition to the foregoing, each Deed of Exchange/Assignment transferring such property must state
that the parties thereto shall undertake to comply with the provisions of these Regulations.

SECTION 7. Submission of Proof of Annotation of Substituted Basis. — No certification/ruling issued


by the Bureau of Internal Revenue shall be valid unless the parties to the exchange submit to the Bureau
copies of the new Transfer Certificates of Title, Condominium Certificates of Title, or certificates of
stock/units of participation, duly certified by the Register of Deeds or the Corporate Secretary, as the case
may be, containing the information required in Section 6 of these Regulations, within ninety (90) days
from receipt by any of the parties to the exchange transaction of the certification-ruling by the Bureau
confirming that the transaction complies with Section 40(C)(2) of the Tax Code of 1997.

SECTION 8. Information to be Included in the Final Adjustment Return and in the Audited Financial
Statements Accompanying the final Adjustment Return; Records to be Maintained by Parties. —
(a) The transferor and the transferee or the surviving/consolidated corporation, as the case may be,
as well as the shareholders of such surviving/consolidated corporation (in case of a merger or
consolidation) shall enclose with their respective income tax returns for the taxable year in which the tax-
free exchange occurred, a copy of the request for ruling filed with, and the corresponding
certification/ruling issued by, the Bureau of Internal Revenue, both duly stamped received by the
appropriate office of the Bureau of Internal Revenue.
(b) Such persons shall likewise include as a note to their respective audited financial statements for
the taxable year in which such exchange occurred a statement to the effect that they hold such
assets/shares acquired in a tax-free exchange and the year in which such exchange occurred, and in the
succeeding taxable years until the subject property/ies is/are subsequently transferred to another
transferee.
(c) In addition to the foregoing, the parties to the transaction shall maintain permanent records of the
transaction, consisting of, among others, the request for ruling, certification or ruling issued by the Bureau
of Internal Revenue, the Deed of Assignment/Exchange, or the Articles of Merger, as the case may be,
and such other documents as may be required to facilitate the determination of gain or loss from a
subsequent disposition of the stocks/unit of participation/interest/properties received or transferred in the
exchange.

SECTION 9. Fees to be Paid by the Applicant/Taxpayer. — Every applicant/taxpayer who wants to


avail of the tax-free exchange in accordance with Section 40(C)(2) and 6(b) and (c) of the Tax Code of
1997 shall secure a form that the Bureau shall provide for such purpose and shall pay in advance a
processing and certification fee of Five Thousand Pesos (P5,000.00) for each application not involving
more than ten (10) real properties and/or Certificates of Stock.
An additional fee of One Hundred Pesos (P100.00) shall be paid for every Transfer Certificate of
Title/Condominium Certificate of Title/Certificate of Stock in excess of ten (10).

SECTION 10. Penalties. — Every official, agent, or employee of the Registry of Deeds who is guilty of
failing to annotate the information stated in Section 5 hereof shall, upon conviction for each omission, be
punished by a fine of not less than Fifty Thousand Pesos (P50,000.00) but not more than One Hundred
Thousand Pesos (P100,000.00) and suffer imprisonment of not less than ten (10) years but not more than
fifteen (15) years and shall likewise suffer an additional penalty of perpetual disqualification to hold public
office, to vote, and to participate in any public election pursuant to Section 58(E) in relation to Section 269
of the Tax Code of 1997.
Every Corporate Secretary or the duly authorized officer of the corporation who is guilty of failing to
annotate the information stated above shall, upon conviction for each omission, be punished by a fine of
not more than One Thousand Pesos (P1,000.00), or suffer imprisonment of not more than six (6) months,
or both pursuant to Section 275 of the Tax Code of 1997.
Any other violation of the provisions of these Regulations by any of the parties to the exchange
transaction or by any responsible public officer, shall be subject to the appropriate penalties provided
under the Tax Code of 1997, and/or the Revised Penal Code.

SECTION 11. Repealing Clause. — Any Revenue Regulations or Revenue Memorandum Order, or
provisions of any revenue issuance, inconsistent with these Regulations are hereby repealed accordingly.

SECTION 12. Effectivity Clause. — These Regulations shall take effect fifteen (15) days after
publication in any newspaper of general circulation.

(SGD.) JOSE ISIDRO N. CAMACHO


Secretary of Finance

Recommending Approval:
(SGD.) RENE G. BAÑEZ
Commissioner of Internal Revenue

May 28, 1992


REVENUE MEMORANDUM ORDER NO. 26-92

Subject : Prescribing the Requirements and Conditions precedent to the Non-Recognition of Gain
in transactions involving Transfer of Properties in Exchange for Shares of Stock under Section 34(c) (2)
of the Tax Code, and the Procedure to be observed in monitoring compliance with said conditions.

To : All Internal Revenue Officers and Others Concerned.

In order to facilitate the determination of whether transfer of properties by individual or corporation in


exchange for shares of stock of another corporation falls under Section 34(c) (2) of the National Internal
Revenue Code, the following requirements must be met, and the conditions complied with by both
transferor and transferee corporation.
The procedures outlined hereunder shall be observed in the monitoring and investigation of tax-free
exchange to ascertain compliance with the conditions set forth in the adjudication letter/ruling issued by
this Office, and in the consequent assessment of tax liabilities if any, due upon subsequent disposition of
the properties involved in the exchange.

I. DOCUMENTATION REQUIREMENTS. –

A. BIR Adjudication letter/ruling -


Any written request to be filed with the Legislative, Ruling and Research Division for a BIR Ruling on the
tax consequence of the transfer/exchange of properties described hereunder must be accompanied by
the following documents.
1) In the case of Merger or Consolidation -
(a) Plan of Corporate Merger or Consolidation;
(b) Statement of the amount and nature of any liabilities assumed upon the exchange, and the
amount and nature of any liabilities to which any of the property acquired in the exchange is subject;
(c) Articles of Incorporation duly registered with SEC of the merging or consolidating corporations;
and
(d) Other pertinent documents.
2) In the case of transfer of property to a controlled corporation.
(a) Deed of Transfer/Assignment/Exchange;
(b) Articles of Incorporation duly registered with SEC of a corporate transferor and transferee
corporation;
(c) Copy of the corresponding Transfer Certificate of Titles;
(d) Copy of the corresponding Tax Declaration;
(e) Certification as to the original or historical cost of acquisition/adjusted cost basis of the properties
transferred;
(f) Certification of the fair market value or zonal value of the property involved in the exchange;
(g) Certification by the corporate secretary of the transferee corporation of its authorized
capitalization and the par value of the shares of stock;
(h) Certification of percentage of ownership of the shares of stock by the transferor as a result of the
transaction; and
(i) Other pertinent documents.

B. Records to be kept and information to be filed. -


In order that the parties to the exchange can avail of the non-recognition of gains under Section 34(c) (2)
of the Tax Code, the following requirements must be complied with:
1) In the case of Merger or Consolidation. -
(a) The plan of reorganization should be adopted by each of the corporations, parties thereto, the
adoption being shown by the acts of its duly constituted responsible officers and appearing upon the
official records of the corporation. Each corporation, which is a party to the reorganization, shall file, as
part of its return for the taxable year within which the reorganization occurred a complete statement of all
facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including:
(1) A copy of the plan of reorganization, together with a statement, executed under the penalties of
perjury, showing in full the purposes thereof and in detail all transactions incident to, or pursuant to the
plan.
(2) A complete statement of the cost or other basis of all property, including all stocks or securities,
transferred incident to the plan.
(3) A statement of the amount of stock or securities and other property or money received from the
exchange, including a statement of all distribution or other disposition made thereof. The amount of each
kind of stock or securities and other property received shall be stated on the basis of the fair market value
thereof at the date of the exchange.
(4) A statement of the amount and nature of any liabilities assumed upon the exchange, and the
amount and nature of any liabilities to which any of the property acquired in the exchange is subject.
(b) Every taxpayer, other than a corporation, a party to the reorganization, who received stock or
securities and other property or money upon a tax-free exchange in connection with a corporate
reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes
place a complete statement of all facts pertinent to the non-recognition of gain or loss upon such
exchange including:
(1) A statement of the cost or other basis of the stock or securities transferred in the exchange; and
(2) A statement in full of the amount of stock or securities and other property or money received from
the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property
received is subject. The amount of each kind of stock or securities and other property (other liabilities
assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at
the date of the exchange.
(c) Permanent records in substantial form shall be kept by every taxpayer who participates in a tax-
free exchange in connection with a corporate reorganization showing the cost or other basis of the
transferred property or money received (including any liabilities assumed on the exchange, or any
liabilities to which any of the properties received were subject), in order to facilitate the determination of
gain or loss from a subsequent disposition of such stock or securities and other property received from
the exchange.
In addition to the foregoing requirements, permanent records in substantial form must be kept by the
corporation participating in the merger showing the information listed above in order to facilitate the
determination of gain or loss from a subsequent disposition of the stock received as a consequence of the
merger.
In a merger or consolidation, one (1) of the corporations would necessarily be dissolved so that, under
Section 235 of the Tax Code, it should be subjected to an investigation for all tax purposes. Proof should
be submitted by any of the two (2) entities to the Legislative, Ruling and Research Division that there was
such an investigation conducted or is being conducted by the BIR.
2) In the case of transfer of property to a controlled corporation. -
(a) The transferor/s must file with his/their income tax return for the taxable year in which the
exchange was consummated, a complete statement of all facts pertinent to the exchange, including:
(1) A Sworn Statement as to how the property was acquired;
(2) A description of the properties transferred, or of their interest in such properties, with a statement
of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the
transfer;
(3) The kind of stock received and preference, if any;
(4) The numbers of shares of each class received, and
(5) The fair market value per share of each class at the date of the exchange.
(b) On the other hand, the transferee corporation must file with its income tax return for the taxable
year in which the exchange was consummated the following:
(1) A complete description of all properties received from the transferor/s;
(2) A statement of the original acquisition cost or other basis of the properties in the hands of the
transferors and the adjusted cost basis thereof at the time of the transfer; and
(3) Information with respect to the capital stock of the corporation including:
(i) The total issued and outstanding capital stock immediately prior to and immediately after the
exchange with a complete description of each class of stock;

(ii) The classes of stocks and number of shares issued to the transferors in the exchange; and
(iii) The fair market value as of the date of the exchange of the capital stock issued to the transferors.
(c) Permanent records in substantial form must be kept by the taxpayers participating in the
exchange, showing the information listed above in order to facilitate the determination of gain or loss from
a subsequent disposition of stocks/properties received in the exchange.
(d) The parties shall cause to be annotated on the Transfer Certificates of Titles (in the case of real
property) or at the back of the Certificate of Stocks (in the case of shares of stock), the date the deed of
exchange was executed, the original or historical cost of acquisition of the properties or shares of stock
involved, and the fact that no gain or loss was recognized as a result of the exchange.

II. CONDITIONS FOR THE ISSUANCE OF CERTIFICATE AUTHORIZING REGISTRATION (CAR).


-

No CAR for the real property involved in the exchange shall be issued by the Revenue District
Officer/Authorized Internal Revenue Officer concerned unless a determination letter/ruling has been
issued by the Commissioner to the effect that the transaction qualifies as a tax-free exchange or
corporate reorganization under Section 34(c) (2) of the Tax Code.
The CAR to be issued shall specify among others that the transaction involved is a tax-free exchange
under Section 34(c) (2) of the Tax Code; the date of exchange; and the original or historical cost of
acquisition of the properties as verified.
Documentary stamp tax imposed under Section 196 of the Tax Code shall be determined and collected
based on the consideration received or contracted for such realty exchanged, i.e. the corresponding value
of the shares of stock; the original issues of Certificates of Stocks by the transferee corporation shall be
subject to documentary stamp tax imposed by Section 175 of the same Code.

III. REQUIREMENTS FOR THE REGISTRATION OR


PROPERTIES. -

A. The Register of Deeds having jurisdiction of the place where the property exchanged is located
shall cause the registration/transfer of the Transfer Certificate of Title (TCT) in the name of the transferee
corporation only upon presentation of the CAR duly issued by the Revenue District Officer/Authorized
Internal Revenue Officer.
The Register of Deeds shall cause the annotation at the back of the TCT to be issued the statement that
the transfer of properties is a Tax-Free Exchange under Section 34(c) (2) of the Tax Code or the fact that
no gain or loss was recognized as a result of such exchange; the original or historical cost of acquisition
thereof, and the date of execution of the Deed of Transfer/Exchange.

B. The Corporate Secretary of the Transferee Corporation shall cause the registration in its stock
transfer book the name/names of the stockholders whose properties were exchanged for shares of stock;
Documentary Stamp Tax imposed under Section 175 of the Tax Code shall be paid to and collected by
the Revenue District Officer concerned on the Certificate of stocks which are original issues by the
transferee corporation in exchange for the property of the transferor.

IV. MONITORING/INVESTIGATION OF TAX-FREE


EXCHANGES. -

A. The Legislative, Ruling and Research Division shall every now and then refer copy/copies of
adjudication letters/rulings issued in connection with tax-free exchange of properties to the respective
Revenue District Officers having jurisdiction of the place where the real property is located, for verification
and monitoring if the conditions set forth therein have been complied with.

B. Since under Section 34(c) (2) of the Tax Code there is merely a deferment of recognition of gain
or loss on the transfer/exchange of properties, any subsequent disposition of the properties involved in
the exchange shall be subject to the corresponding income tax on the gain or income derived by the
transferor or transferee corporation.

C. In determining the income and documentary stamp taxes due on subsequent disposition of the
properties involved in the exchange, the basis of the computation shall be the difference between the
original/historical or adjusted cost of acquisition of the property and the consideration of sale or the fair
market value/zonal value of the property, whichever is higher. On the other hand, the cost basis of the
shares of stock shall be the same as the original acquisition cost or adjusted cost basis to the transferor
of the properties exchanged therefor.

V. REPEALING CLAUSE. –

All regulations, rules, orders or portions thereof contrary to or inconsistent with the provisions of this Order
are hereby modified and/or repealed accordingly.

VI. EFFECTIVITY. –

This Order shall take effect immediately.

JOSE U. ONG
Commissioner of Internal Revenue

REVENUE MEMORANDUM RULING NO. 01-01


SUBJECT : Tax Consequences of Tax-Free Exchange of Property for Shares of Stock of a
Controlled Corporation Pursuant to Section 40(C)(2) of the National Internal Revenue Code of 1997

TO : All Internal Revenue Officers and Others Concerned

Pursuant to Section 4, in relation to Sections 40(C)(2), (4), (5), (6), 175, 176, and 196, and pertinent
provisions of Titles II, IV and VII of the National Internal Revenue Code of 1997 (Tax Code of 1997), this
Revenue Memorandum Ruling is issued to consolidate, provide, clarify and harmonize the existing
guidelines on the tax consequences of a non-recognition transaction consisting of a tax-free exchange of
property for shares of stock under Section 40(C)(2) of the Tax Code of 1997. This Revenue Memorandum
Ruling shall apply solely and exclusively to, and may be relied upon only in situations in which the facts
are substantially similar to the facts stated below, but subject to the principles of substance over form.

I. FACTS

1. A domestic corporation (the "Transferor") owns certain property, consisting, for example, of the
following:

1.1 Land encumbered by a real estate mortgage (REM);


1.2 Buildings;
1.3 100 shares of stock in G Corporation with a par value of P10 per share;
1.4 50 shares of stock in D Corporation without par value;
1.5 Unsecured receivables;
1.6 Loans to Q ("Borrower/Mortgagor"), secured by a real estate mortgage;
1.7 Cash.

2. X Corporation (the "Transferee") is a domestic corporation.

3. The Transferor transfers the property to the Transferee. In exchange, the Transferee issues
shares to the Transferor out of the unissued portion of its existing authorized capital stock, or, if such
existing authorized capital stock is insufficient, out of shares from an increase in the Transferee's
authorized capital stock. The Transferor does not receive any money or property other than the
aforementioned shares of the transferee.

4. The property transferred by the Transferor-corporation constitutes less than 80% of the
Transferor's assets, including cash.

5. In addition to the transfer of the property, the Transferee assumes liabilities of the Transferor.
However, the sum total of the amount of liabilities assumed, plus the amount of the encumbrance or REM
on the Land (as stated in Section 40(C)(4) of the Tax Code of 1997 — "liabilities to which the property is
subject") do not exceed the basis of the property transferred.

6. The shares are neither issued in payment for services, nor for settlement of an outstanding
liability that arises from the performance of services rendered by the Transferor to the Transferee.

7. As a result of the above-mentioned transfer, the Transferor acquires at least 51% of the total
outstanding capital stock of the Transferee entitled to vote.

II TAX CONSEQUENCES

1. Income tax. The Transferor shall not recognize any gain or loss on the transfer of the property to
the Transferee. Consequently, the Transferor will not be subject to capital gains tax, income tax, or to
creditable withholding tax on the transfer of such property to the Transferee. Neither may the transferor
recognize a loss, if any, incurred on the transfer. The last paragraph of Section 40(C)(2) and (6)(c) of the
Tax Code of 1997 state:
"No gain or loss shall also be recognized if property is transferred to a corporation by a person in
exchange for stock or unit of participation in such corporation of which as a result of such exchange said
person, alone or together with others, not exceeding four (4) persons, gains control of said corporation:
Provided, That stocks issued for services shall not be considered as issued in return for property."
"(c) The term "control", when used in this Section, shall mean ownership of stocks in a corporation
possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to
vote."

In addition, the assumption of liabilities or the transfer of property that is subject to a liability does not
affect the non-recognition of gain or loss under Section 40(C)(2) of the Tax Code of 1997, since in this
case, the total amount of such liabilities does not exceed the basis of the property transferred. Section
40(C)(4) of the Tax Code of 1997 states:

"(4) Assumption of liability. —

(a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives
stock or securities which would be permitted to be received without the recognition of the gain if it were
the sole consideration, and as a part of the consideration, another party to the exchange assumes a
liability of the taxpayer, or acquires from the taxpayer property, subject to a liability, then such assumption
or acquisition shall not be treated as money and/or other property, and shall not prevent the exchange
from being within the exceptions.

(b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is
subject exceed the total amount of the adjusted basis of the property transferred pursuant to such
exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or
of property which is not a capital asset, as the case may be."

In addition, the Transferee is not subject to income tax on its receipt of the property as contribution to its
capital, even if the value of such property exceeds the par value or stated value of the shares issued to
the Transferor. Section 55 of Revenue Regulations No. 2 ("Income Tax Regulations") states:

"Section 55. Acquisition or disposition by a corporation of its own capital stock. — . . . . The receipt by
a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise
to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less
than the par or stated value of such stock.

xxx xxx xxx"

However, stocks shall not be issued for a consideration less than par or issued price thereof. (Section 62,
Corporation Code of the Philippines)

2. Donor's tax. The Transferor is not subject to donor's tax, regardless of whether the value of the
property transferred exceeds the par/stated value of the Transferee shares issued to the Transferor, there
being no intent to donate on the part of the Transferor.

3. Value added tax. The Transferor is not subject to value-added tax ("VAT") on the transfer of the
property if it is not engaged in a business that is subject to the VAT under Title IV of the Tax Code of
1997. Even if the Transferor is engaged in an activity that is subject to VAT, it is nonetheless not subject
to VAT on the transfer of the property to the Transferee, since the Transferor gains control of the
Transferee. Section 4.100-5(b)(1) of Revenue Regulations No. 7-95, as amended states:

"(b) Not subject to output tax. — The VAT shall not apply to goods or properties existing as of the
occurrence of the following:

1) Change of control of a corporation by the acquisition of the controlling interest of such corporation
by another stockholder or group of stockholders, Example: transfer of property to a corporation in
exchange for its shares of stock under Section 34(c)(2) and (6)(c) of the Code [now 40(C)(2) and (6)(c) of
the Tax Code of 1997].

4. Documentary stamp tax. The documentary stamp tax consequences of the transfer are as
follows:

4.1 Either the Transferor or the Transferee is subject to documentary stamp tax as follows:
4.1.1 On the transfer of real property (Section 196, Tax Code of 1997) — P15 on each P1,000 or
fractional part thereof, based on the higher of: (i) the consideration contracted to be paid for such real
property, and (ii) the fair market value as determined in accordance with Section 6(E) of the Tax Code of
1997.
4.1.1.1 The "consideration contracted to be paid for such real property" shall be computed in accordance
with the following rules. "Stock in a corporation is a valuable consideration for the transfer of real
property." (Section 177, Revenue Regulations No. 26) Therefore, the consideration for the real property
shall be computed as the par/stated value of the Transferee shares issued to the Transferor in exchange
for such property plus the value of such property in excess of such par/stated value recognized in the
books of the Transferee as premium, additional capital contribution, or donated surplus, or the like. For
instance, if the value of the property is P1,000,000, but only shares with an aggregate par value of
P250,000 are issued, there being a premium above par of P750,000, which the Transferee records as
additional capital contribution, donated surplus, or the like, the consideration is P1,000,000 (that is, par
value of P250,000 + premium of P750,000).
4.1.1.2 On the other hand, the fair market value of the property as determined in accordance with Section
6(E) of the Tax Code of 1997 whichever is higher between (1) the fair market value as determined by the
Commissioner (that is, zonal value), and (2) the fair market value as shown in the schedule of values of
the Provincial and City Assessors.
4.1.1.3 The value of the improvements thereon shall be based on the formula provided under Revenue
Audit Memorandum Order (RAMO) No. 1-2001 but shall not be lower than the fair market value in the Tax
Declaration in the year of exchange.
According to the said RAMO, the value of the improvement shall be determined by deducting the zonal
value of the land from the total selling price/consideration per Deed of Exchange. Thus, if the total selling
price/consideration per Deed of Exchange is P1,000,000.00 and the zonal value of the land is
P600,000.00, then the value of the improvement is P400,000.00.
The fair market value of the improvement shall be determined per latest tax declaration at the time of its
sale or disposition (in this particular case, the exchange of such property). If the tax declaration was
issued three (3) or more years prior to the date of sale or disposition, the Transferor shall be required to
submit a certification from the city/municipal assessor as to the fact that such tax declaration is the latest
tax declaration covering the real property. Absent such certification, the Transferor must secure a copy of
the latest tax declaration duly certified by the assessor.
4.1.2 On the transfer of shares of stock held by the Transferor (Section 176, Tax Code of 1997) —
4.1.2.1 The transfer of the shares of G Corporation, which have a par value, is subject to documentary
stamp tax of P1.50 on each P200 or fractional part thereof of the par value of such shares.
4.1.2.2 The transfer of the shares of D Corporation, which are without par value, is subject to the
documentary stamp tax of 25% of the documentary stamp tax that was paid when those shares were
originally issued.
4.1.3 Transfer of mortgage (Section 198, in relation to Section 195, Tax Code of 1997) — The transfer
of the real estate mortgage, as a consequence of the transfer of the loan to Q ("Borrower/Mortgagor"), is
subject to documentary stamp tax at the following rate:
(a) When the amount secured does not exceed five thousand pesos (P5,000) — twenty pesos (P20);
(b) On each five thousand pesos (P5,000), or fractional part thereof in excess of five thousand pesos
(P5,000), an additional tax of ten pesos (P10).
4.2 The Transferee is subject to documentary stamp tax on the original issuance of its shares
(Section 175, Tax Code of 1997), at the following rate, depending on whether such shares are par or no-
par shares:
4.2.1 If the Transferee's shares are with par value, the documentary stamp tax is imposed at the rate of
P2 on each P200 or fractional part thereof of the par value of such shares, regardless of whether the
shares are issued at par value or for a premium (that is, for a consideration in excess of par value).
4.2.2 If the Transferee's shares are without par value, the documentary stamp tax is imposed at the
rate of P2 on each P200 or fractional part thereof of the actual consideration paid for such shares.
5. Time of Payment of Taxes. The time for the payment of the documentary stamp tax liabilities,
whether the taxpayer is an e-filer or not, shall be as follows:
5.1 With respect to the transfer of property mentioned in 4.1, above, the documentary stamp tax shall
be paid on or before the fifth (5th) day after the close of the month when the deed of assignment/transfer
transferring such property was executed, made, signed, accepted, or transferred (Section 5, Revenue
Regulations No. 6-2001).
5.2 With respect to the original issuance of shares mentioned in 4.2, above, the documentary stamp
tax shall be paid on or before the fifth (5th) day after the close of the month of —
5.2.1 Approval of SEC registration, in case of original incorporation;
5.2.2 Approval of the increase in authorized capital stock, in case the shares issued to the Transferee
come from the increase in authorized capital stock of the Transferee; or
5.2.3 Execution of the deed of assignment/transfer of the property for which the Transferee's shares
are issued, in case the shares issued to the Transferor come from the unissued portion of the
Transferee's existing authorized capital stock.

III ADDITIONAL FACTS AND VARIATIONS NOT AFFECTING TAX CONSEQUENCES


The following additional facts or variations will not affect the tax consequences of the transaction, as
described above:

1. In no. 1 of "I. Facts" stated above, if the total number of Transferors does not exceed five
persons, whether such persons are natural persons or juridical persons.
2. In no. 7 of "I. Facts" stated above, the tax consequences are not affected by whether the
Transferor is/was a shareholder prior to the transaction, or that, prior to the transaction, the Transferor
already possessed control of the Transferee by owning 51% or more of the total outstanding capital stock
of the Transferee entitled to vote. In such a case, the Transferor is deemed to have acquired "further
control" of the Transferee, which places the transaction within the purview of Section 40(C)(2) of the Tax
Code of 1997.
However, a Transferor who, prior to the transaction was an existing shareholder of the Transferee, but
who owned less than 51% of the voting stocks of the Transferee (even if it, together with not more than
four (4) persons, owned more than 51% of all classes of stocks entitled to vote of the Transferee) cannot
be deemed to have gained control or further control of the Transferee if, after a transaction in which it is
the sole transferor, it still owned by itself less than 51% of the voting stocks of the Transferee. For
instance, assume in the above facts that, prior to the transfer, the Transferor, together with Stockholders
E, B, M and R, owned 100% of the voting stocks of the Transferee. However, by itself the Transferor
owned only 32% of the voting stocks of the Transferee (the balance of the 68% voting stocks being
owned by Stockholders E, B, M and R). The Transferor transfers property to the Transferee in exchange
for shares of stock. After this exchange, the Transferor owned, including the initial 32%, a total of 49% —
or less than 51% — of the voting stocks of the Transferee. In this situation, the Transferor is not deemed
to have gained control or further control of the Transferee.

IV FURTHER CLARIFICATION OF FACTS AND TAX CONSEQUENCES

1. No. 1 of "I. Facts" mentions "property". For purposes of Section 40(C)(2) of the Tax Code of 1997,
this term excludes services, accounts receivable for services rendered by the Transferor for the
Transferee, cash and the conversion of debt into equity.
2. No. 3 of "I. Facts" mentions the issuance of the Transferee's shares from the "unissued portion of
its existing authorized capital stock, or, if such existing authorized capital stock is insufficient, out of
shares from an increase in the Transferee's authorized capital stock". This statement of fact excludes the
following, which if present, would give rise to a different tax consequence treated elsewhere other than in
this Revenue Memorandum Ruling —
2.1 The issuance of treasury shares, which have previously been issued but were subsequently re-
acquired by the Transferee and have not been retired.
2.2 Settlement of subscription receivables Therefore, the tax consequences described above shall
not apply to the extent that the property is transferred in payment for the unpaid balance of the
subscription to shares.
3. No. 4 of "I. Facts" mentions the property transferred constituting "less than 80% of the
Transferor's assets, Including cash". This requirement is necessary to distinguish this transaction from a
de facto merger as described in Section 40(C)(6)(b) of the Tax Code of 1997 in relation to BIR Circular
No. V-253 dated July 16, 1957, the tax consequences of which will be discussed in a different Revenue
Memorandum Ruling.
4. No. 5 of "I. Facts" mentions the term "adjusted basis of the property", as well as the fact that such
liabilities assumed and to which the property is subject "do(es) not exceed the adjusted basis of the
property transferred". These terms are clarified as follows:
4.1 The basis or "original basis" of the property is its "historical cost". "Historical cost" is the value of
the property as determined pursuant to Section 40(B) of the Tax Code of 1997. The term "adjusted basis"
is the value of the property as determined pursuant to the said Section, modified by adjustments to the
historical cost. For example, the "adjusted basis" of a property acquired by purchase is the historical cost
(acquisition cost) of such property increased by, among others, the amount of improvements that
materially add to the value of the property or appreciably prolong its life and decreased by accumulated
depreciation. "Adjusted basis" excludes re-appraisal surplus, whether or not recorded in the books of the
Transferor.
4.2 "Property" does not include services or accounts receivable for services rendered by the
Transferor to the Transferee, cash, or the conversion of debt into equity. Therefore, in determining
whether liabilities assumed and to which the property is subject "do(es) not exceed the adjusted basis of
the property transferred", the value of services rendered, cash and the conversion of debt into equity will
be excluded from the computation of "adjusted basis of the property transferred". HAISEa
5. The term "adjusted basis" should be distinguished from the term "substituted basis", since they
are not necessarily synonymous. The terms "original basis" and "adjusted basis" are used in reference to
the value of the property before it was transferred by the Transferor; whereas, the term "substituted basis"
is used in reference to both the value of the property in the hands of the Transferee after its transfer and
the shares received by the Transferor from the Transferee. The term "substituted basis" is significant in
determining the tax basis of the aforementioned property or shares for purposes of computing the gain or
loss on the subsequent disposition of such property or shares. The following rules will apply in
determining substituted basis:
5.1 In general, the substituted basis of the Transferee's shares received by the Transferor for
purposes of computing gain or loss on the subsequent disposition of such shares by the Transferor is
equal to the Transferor's basis in the property at the time of the transfer (that is, "historical cost/original
basis" or "adjusted basis", as the case may be) decreased by (1) the money received by the Transferor,
and (2) the fair market value of the other property received by the Transferor, and increased by (a) the
amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized on the
exchange. If, as in this case, the Transferee assumed liabilities of the Transferor and/or acquired property
of the Transferor that is subject to liabilities, the amount of liabilities shall be treated as money for
purposes of determining the substituted basis. In the particular facts covered by this Revenue
Memorandum Ruling, the substituted basis of the Transferee's shares acquired by the Transferor is the
historical cost/original basis or adjusted basis of the properties mentioned in no. 1 of "I. Facts" (excluding
cash), less the total of (a) the amount of liabilities assumed by the Transferee and (b) the amount of real
estate mortgage on the Land.

Section 40(C)(5)(a) of the Tax Code of 1997 states:

"(5) Basis. —

(a) The basis of the stock or securities received by the transferor upon the exchange specified in the
above exception shall be the same as the basis of the property, stock or securities exchanged, decreased
by (1) the money received, and (2) the fair market value of the other property received, and increased by
(a) the amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized
on the exchange; Provided, That the property received as "boot" shall have as basis its fair market value;
provided, further, that if as part of the consideration to the transferor, the transferee of property assumes
a liability of the transferor or acquires from the latter property subject to a liability, such assumption or
acquisition (in the amount of the liability) shall, for purposes of this paragraph, be treated as money
received by the transferor on the exchange; provided, finally, that if the transferor receives several kinds
of stock or securities, the Commissioner is hereby authorized to allocate the basis among the several
classes of stocks or securities." ICcDaA
5.2 On the other hand, the substituted basis of the property in the hands of the Transferee for
purposes of computing gain or loss on the subsequent disposition of such property by the Transferee is
the Transferor's original or adjusted basis in such property at the time of transfer plus the gain recognized
to the transferor on the exchange. Section 40(C)(5)(b) of the Tax Code of 1997 states:
"The basis of the property transferred in the hands of the transferee shall be same as it would be in the
hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer."
In the particular facts of this Revenue Memorandum Ruling, there are no circumstances under which the
Transferor recognizes gain. Thus, in this case, the substituted basis of the property in the hands of the
Transferee is equal to the Transferor's original or adjusted basis in such property at the time of the
transfer.
6. No. 7 of "I. Facts" mentions that the Transferor acquires "at least 51% of the total outstanding
capital stock of the Transferee entitled to vote". Shares of stock "entitled to vote" excludes those shares
that have been denied voting rights in the Transferee's Articles of Incorporation, in accordance with the
provisions of Batas Pambansa Blg. 68 ("The Corporation Code of the Philippines" or the "Corporation
Code") (although the Corporation Code may retain the right of holders of preferred shares to vote in
certain instances specified in the Code).
For instance, assume in the above Facts, that the Transferee has an authorized capital stock of
P32,550,000.00 divided into 265,000 common shares and 2,990,000 preferred non-voting shares with a
par value of P10.00 per share. Only common shares have voting rights. The stockholders of the
Transferee before the transfer are the following:

Stockholders Common Preferred


Transferor 135,490 9
B 10 8
C 64,000 651,244
D 64,000 651,246
E 1,497 530,340
F 1 1
G 1 1
H 1 1
———— ————
TOTAL 265,000 1,832,850
======== ========

The Transferee increases its authorized capital stock by increasing only the number of its common
shares. Out of this increase, the Transferor subscribes to 298,450 common shares for a total subscription
price of P2,984,500.00, which subscription is paid in property.
As a result of the subscription the Transferor gains control of the Transferee by owning 77.01%
(433,940/563,450 common shares) of the latter's outstanding shares of stock that are entitled to vote, to
wit:

Stockholders Common Preferred


Transferor 433,940 9
B 10 8
C 64,000 651,244
D 64,000 651,246
E 1,497 530,340
F 1 1
G 1 1
H 1 1
———— ————
TOTAL 563,450 1,832,850
======== =======

7. If the Transferor is a Philippine branch of a foreign corporation, and the branch is incorporated
into the Transferee corporation (such that the branch will no longer exist after the incorporation of the
Transferee) directly owned by the head office, in addition to the tax consequences described above, the
branch will be subject to the 15% branch profits remittance tax to the extent that there are unremitted
branch profits at the time of transfer (Section 28(A)(5), Tax Code of 1997), since the transaction will be
considered a constructive remittance of branch profits to the head office which is converted into equity of
the Transferee corporation. The 15% rate may be reduced under applicable provisions of the various tax
treaties to which the Philippines is a signatory.

V COMPLIANCE

In addition to the foregoing, the Transferor/s and Transferee should comply with their obligations as
provided in Revenue Regulations No. 18-2001 dated November 13, 2001 and Revenue Memorandum
Order No. ____ dated November ____, 2001.

VI REPEALING CLAUSE

All Rulings that are inconsistent with this Revenue Memorandum Ruling are hereby repealed accordingly.

VII EFFECTIVITY

Subject to the provisions of Section 246 of the Tax Code of 1997, this Revenue Memorandum Ruling
shall take effect immediately.

(SGD.) RENE G. BAÑEZ


Commissioner of Internal Revenue

REVENUE MEMORANDUM RULING NO. 01-02


SUBJECT : Tax Consequences of De Facto Merger Pursuant to Section 40(C)(2) and (6)(b)
of the National Internal Revenue Code of 1997

TO : All Internal Revenue Officers and Others Concerned

Pursuant to Section 4, in relation to Sections 40(C)(2), (4), (5), (6), 175, 176, and 196, and pertinent
provisions of Titles II, IV and VII of the National Internal Revenue Code of 1997 (Tax Code of 1997), this
Revenue Memorandum Ruling is issued to consolidate, provide, clarify and harmonize the existing
guidelines on the tax consequences of a de facto merger under Section 40(C)(2) and (6)(b) of the Tax
Code of 1997. This Revenue Memorandum Ruling shall apply solely and exclusively to, and may be relied
upon only in situations in which the facts are substantially similar to the facts stated below, but subject to
the principle that for such transaction to be considered a de facto merger within the purview of Section
40(C)(2) in relation to 40(6)(b) of the Tax Code of 1997, the same must be undertaken for a bona fide
business purpose and not solely for the purpose of escaping the burden of taxation.

I. FACTS

1. A domestic corporation (the "Transferor") owns certain property, consisting, for example, of the
following:
1.1 Land encumbered by a real estate mortgage (REM);
1.2 Buildings;
1.3 100 shares of stock in G Corporation with a par value of P10 per share;
1.4 50 shares of stock in D Corporation without par value;
1.5 Unsecured receivables;
1.6 Loans to Q ("Borrower/Mortgagor"), secured by a real estate mortgage;
1.7 Cash.

2. The property transferred by the Transferor constitutes at least 80% of the Transferor's assets,
including cash.

3. The Transferor transfers the property to the Transferee. In exchange, the Transferee issues
shares to the Transferor out of the unissued portion of its existing authorized capital stock, or, if such
existing authorized capital stock is insufficient, out of shares from an increase in the Transferee's
authorized capital stock. The Transferor does not receive any money or property other than the
aforementioned shares of the transferee.

4. In addition to the transfer of the property, the Transferee assumes liabilities of the Transferor.
However, the sum total of the amount of liabilities assumed, plus the amount of the encumbrance or REM
on the Land (as stated in Section 40(C)(4) of the Tax Code of 1997 — "liabilities to which the property is
subject") do not exceed the basis of the property transferred.

II. GENERAL PRINCIPLES

1. A de facto merger involves the acquisition by one corporation of all or substantially all the
properties of another solely for stock. Section 40(C)(6)(b) of the Tax Code of 1997 states:
"The term "merger" or "consolidation," when used in this Section, shall be understood to mean: (i) the
ordinary merger or consolidation; or (ii) the acquisition by one corporation of all or substantially all the
properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a
merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business
purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in
determining whether a bona fide business purpose exists, each and every step of the transaction shall be
considered and the whole transaction or series of transactions shall be treated as a single unit: Provided,
finally, That in determining whether the property transferred constitutes a substantial portion of the
property of the transferor, the term "property" shall be taken to include the cash assets of the transferor."
(Emphasis supplied)
The phrase "substantially all the properties of another corporation" is defined in BIR General Circular No
V-253 dated July 16, 1957 to mean "the acquisition by one corporation of at least 80% of the assets,
including cash, of another corporation," which 'has the element of permanence and not merely
momentary holding'.
To constitute a de facto merger, the following elements must concur: (1) there must be a transfer of all or
substantially all of the properties of the transferor corporation solely for stock, and (2) it must be
undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of
taxation.
One basic difference between a de facto merger and a statutory merger is that the Transferor is not
automatically dissolved in the case of the former. Likewise, there is no automatic transfer to the
Transferee of all the rights, privileges, and liabilities of the Transferor. It is, in fact, in procedure, similar to
a transfer to a controlled corporation under the same Section 40(C)(2) of the Tax Code of 1997, except
that at least 80% of the Transferor's assets, including cash, are transferred to the Transferee, with the
element of permanence and not merely momentary holding. However, a de facto merger and a transfer to
a controlled corporation are different in that, (1) the Transferor in a de facto merger is a corporation, while
in a transfer to a controlled corporation, the Transferors may either be a corporation or an individual, and
(2) in a de facto merger, there is no requirement that the transferor gains control (that is, 51% of the total
voting powers of all classes of stocks of the Transferee entitled to vote) of the Transferee as a
prerequisite to enjoying the benefit of non-recognition of gain or loss. What is essential in a de facto
merger is that the Transferee acquires all or substantially all of the properties of the Transferor.

III. TAX CONSEQUENCES

1. Income tax. The Transferor shall not recognize any gain or loss on the transfer of the property to
the Transferee. Consequently, the Transferor will not be subject to capital gains tax, income tax, nor to
creditable withholding tax on the transfer of such property to the Transferee. Neither may the Transferor
recognize a loss, if any, incurred on the transfer.
In addition, the assumption of liabilities or the transfer of property that is subject to a liability does not
affect the non-recognition of gain or loss under Section 40(C)(2) of the Tax Code of 1997, since in this
case, the total amount of such liabilities does not exceed the basis of the property transferred. Section
40(C)(4) of the Tax Code of 1997 states:
"(4) Assumption of liability. —
(a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives
stocks or securities which would be permitted to be received without the recognition of the gain if it were
the sole consideration, and as a part of the consideration, another party to the exchange assumes a
liability of the taxpayer, or acquires from the taxpayer property, subject to a liability, then such assumption
or acquisition shall not be treated as money and/or other property, and shall not prevent the exchange
from being within the exceptions.
(b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is
subject exceed the total amount of the adjusted basis of the property transferred pursuant to such
exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or
of property which is not a capital asset, as the case may be."
Moreover, the Transferee is not subject to income tax on its receipt of the property as contribution to its
capital, even if the value of such property exceeds the par value or stated value of the shares issued to
the Transferor: Section 55 of Revenue Regulations No. 2 ("Income Tax Regulations") states:
"Section 55. Acquisition or disposition by a corporation of its own capital stock. — . . . The receipt by a
corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to
neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less
than the par or stated value of such stock.
xxx xxx xxx"
However, stocks shall not be issued for a consideration less than par or issued price thereof. (Section 62,
Corporation Code of the Philippines)

2. Donor's tax. The Transferor is not subject to donor's tax, regardless of whether the value of the
property transferred exceeds the par/stated value of the Transferee shares issued to the Transferor, there
being no intent to donate on the part of the Transferor.
3. Value-added tax. The Transferor is not subject to value-added tax ("VAT") on the transfer of the
property if it is not engaged in a business that is subject to the VAT under Title IV of the Tax Code of
1997. Even if the Transferor is engaged in an activity that is subject to VAT, it is nonetheless not subject
to VAT on the transfer of the property to the Transferee. Section 4.100-5(b)(1) & (3) of Revenue
Regulations No. 7-95, as amended states:
"(b) Not subject to output tax. — The VAT shall not apply to goods or properties existing as of the
occurrence of the following:
1) Change of control of a corporation by the acquisition of the controlling interest of such corporation
by another stockholder or group of stockholders. Example: transfer of property to a corporation in
exchange for its shares of stock under Section 34(c)(2) and (6)(c) of the Code [now 40(C)(2) and (6)(c) of
the Tax Code of 1997].
xxx xxx xxx
3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation as of
the date of merger or consolidation shall be absorbed by the surviving or new corporation."
Thus, since a de facto merger is considered within the definition of a merger under Section 40(C)(6) of the
Tax Code of 1997, the transfer of the property by the Transferor to the Transferee shall not be subject to
VAT. However, the second sentence of Section 4.100-5(b)(3), supra, is inapplicable in de facto mergers,
and therefore, the Transferor's unused input tax cannot be absorbed by or transferred to the Transferee.
The above sentence contemplates only a statutory merger or consolidation that, by operation of law,
results in a "dissolved corporation" and a "surviving or new corporation". Furthermore, pursuant to Section
80 of the Corporation Code of the Philippines, the unused input tax, being an asset, is transferred in
statutory merger by operation of law.

4. Documentary stamp tax. The documentary stamp tax consequences of the transfer are as
follows:
4.1 Either the Transferor or the Transferee is subject to documentary stamp tax as follows:
4.1.1 On the transfer of real property (Section 196, Tax Code of 1997) — P15 on each P1,000 or
fractional part thereof, based on the higher of: (i) the consideration contracted to be paid for such real
property, and (ii) the fair market value as determined in accordance with Section 6(E) of the Tax Code of
1997.
4.1.1.1 The "consideration contracted to be paid for such real property" shall be computed in accordance
with the following rules. "Stock in a corporation is a valuable consideration for the transfer of real
property." (Section 177, Revenue Regulations No. 26) Therefore, the consideration for the real property
shall be computed as the par/stated value of the Transferee shares issued to the Transferor in exchange
for such property plus the value of such property in excess of such par/stated value recognized in the
books of the Transferee as premium, additional capital contribution, or donated surplus, or the like. For
instance, if the value of the property is P1,000,000, but only shares with an aggregate par value of
P250,000 are issued, there being a premium above par of P750,000, which the Transferee records as
additional capital contribution, donated surplus, or the like, the consideration is P1,000,000 (that is, par
value of P250,000 + premium of P750,000).
4.1.1.2 On the other hand, the fair market value of the property as determined in accordance with Section
6(E) of the Tax Code of 1997 whichever is higher between (1) the fair market value as determined by the
Commissioner (that is, zonal value), and (2) the fair market value as shown in the schedule of values of
the Provincial and City Assessors.
4.1.1.3 The value of the improvements thereon shall be based on the formula provided under Revenue
Audit Memorandum Order (RAMO) No. 1-2001 but shall not be lower than the fair market value in the Tax
Declaration in the year of exchange.
According to the said RAMO, the value of the improvement shall be determined by deducting the
zonal value of the land from the total selling price/consideration per Deed of Exchange. Thus, if the total
selling price/consideration per Deed of Exchange is P1,000,000.00 and the zonal value of the land is
P600,000.00, then the value of the improvement is P400,000.00. HcSaAD
The fair market value of the improvement shall be determined per latest tax declaration at the
time of its sale or disposition (in this particular case, the exchange of such property). If the tax declaration
was issued three (3) or more years prior to the date of sale or disposition, the Transferor shall be required
to submit a certification from the city/municipal assessor as to the fact that such tax declaration is the
latest tax declaration covering the real property. Absent such certification; the Transferor must secure a
copy of the latest tax declaration duly certified by the assessor.
4.1.2 On the transfer of shares of stock held by the Transferor (Section 176, Tax Code of 1997) —
4.1.2.1 The transfer of the shares of G Corporation, which have a par value, is subject to documentary
stamp tax of P1.50 on each P200 or fractional part thereof of the par value of such shares.
4.1.2.2 The transfer of the shares of D Corporation, which are without par value, is subject to the
documentary stamp tax of 25% of the documentary stamp tax that was paid when those shares were
originally issued.
4.1.3 Transferee is subject to documentary stamp tax on the original issuance of its shares (Section
175, Tax Code of 1997), at the following rate, depending on whether such shares are par or no-par
shares:
4.1.4 If the Transferee's shares are with par value, the documentary stamp tax is imposed at the rate of
P2 on each P200 or fractional part thereof of the par value of such shares, regardless of whether the
shares are issued at par value or for a premium (that is, for a consideration in excess of par value).
4.1.5 If the Transferee's shares are without par value, the documentary stamp tax is imposed at the
rate of P2 on each P200 or fractional part thereof of the actual consideration paid for such shares.

5. Time of payment of Documentary Stamp Taxes. The time for the payment of the documentary
stamp tax liabilities, whether the taxpayer is an e-filer or not, shall be as follows:
5.1 With respect to the transfer of property mentioned in 4.1 above, the documentary stamp tax shall
be paid on or before the fifth (5th) day after the close of the month when the deed of assignment/transfer
transferring such property was executed, made, signed, accepted, or transferred (Section 5, Revenue
Regulations No. 6-2001).
5.2 With respect to the original issuance of shares mentioned in 4.2, above, the documentary stamp
tax shall be paid on or before the fifth (5th) day after the close of the month of —
5.2.1 Approval of SEC registration, in case of original incorporation;
5.2.2 Approval of the increase in authorized capital stock, in case the shares issued to the Transferor
come from the increase in authorized capital stock of the Transferee; or
5.2.3 Execution of the deed of assignment/transfer of the property for which the Transferee's shares
are issued, in case the shares issued to the Transferor come from the unissued portion of the
Transferee's existing authorized capital stock.

IV. ADDITIONAL FACTS AND VARIATIONS NOT AFFECTING TAX CONSEQUENCES

The following additional facts or variations will not affect the tax consequences of the transaction, as
described above:

1. In no. 1 of "I. Facts" stated above, the total number of Transferors in a de facto merger is not
relevant in determining whether it qualifies for non-recognition of gain or loss. However, non-recognition
of gain or loss will apply to the Transferors that meet the requirements for a de facto merger described in
"II. General Principles".

2. In no. 3 of "I. Facts" stated above, the shares issued by the Transferee may either be voting or
non-voting stocks since the voting requirement applies only to a transfer to a controlled corporation,
pursuant to Section 40(C)(2) in relation to 40(C)(6)(c) of the Tax Code of 1997.

3. The tax consequences are not affected by whether the Transferor is/was a shareholder prior to
the transaction.

4. Paragraph IV(4) & (5) of Revenue Memorandum Ruling 1-2001 dated November 29, 2001, which
discuss the tax basis of property and shares involved in a merger, consolidation or transfer to a controlled
corporation, are hereby reproduced and adopted by reference in this Revenue Memorandum Ruling.

V. FURTHER CLARIFICATION OF FACTS AND TAX CONSEQUENCES

1. No. 1 of "I. Facts" mentions "property". For purposes of Section 40(C)(2) of the Tax Code of 1997,
this term excludes services, accounts receivable for services rendered by the Transferor for the
Transferee, cash and the conversion of debt into equity.
2. No. 2 of "I. Facts" mentions the property transferred constituting "at least 80% of the Transferor's
assets, including cash". This distinguishes this transaction from a transfer to a controlled corporation as
described in Section 40(C)(2) of the Tax Code of 1997 and Revenue Memorandum Ruling No. 1-2001
dated November 29, 2001.
3. No. 3 of "I. Facts" mentions the issuance of the Transferee's shares from the "unissued portion of
its existing authorized capital stock, or, if such existing authorized capital stock is insufficient, out of
shares from an increase in the Transferee's authorized capital stock". This statement of fact excludes the
following, which if present, would give rise to a different tax consequence treated elsewhere other than in
this Revenue Memorandum Ruling —
3.1 The issuance of treasury shares, which have previously been issued but were subsequently re-
acquired by the Transferee and have not been retired.
3.2 Settlement of subscription receivables. Therefore, the tax consequences described above shall
not apply to the extent that the property is transferred in payment for the unpaid balance of the
subscription to shares.
VI. Compliance
In addition to the foregoing, the Transferor/s and Transferee should comply with their obligations as
provided in Revenue Regulations No. 18-2001 dated November 18, 2001 and Revenue Memorandum
Order No. 32-2001 dated November 28, 2001.
VII. Repealing Clause
All rulings that are inconsistent with this Revenue Memorandum Ruling are hereby repealed accordingly.
VIII. Effectivity
Subject to the provisions of Section 246 of the Tax Code of 1997, this Revenue Memorandum Ruling
shall take effect immediately.

(SGD.) RENÉ G. BAÑEZ


Commissioner of Internal Revenue

REVENUE REGULATIONS NO. 13-99


SUBJECT : Exemption of Certain Individuals from the Capital Gains Tax on the Sale,
Exchange or Disposition of a Principal Residence under Certain Conditions

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. — Pursuant to Section 244, in relation to Section 24(D)(2) of the National Internal
Revenue Code of 1997 , these Regulations are hereby promulgated to govern the exemption of a citizen
or a resident alien individual from capital gains tax on the sale, exchange or disposition of his principal
residence.

SECTION 2. Definition of Terms. — For purposes of these Regulations, the following items shall have
the following meaning:

(1) "Natural person" — shall refer to a citizen or resident alien individual taxable under Sec. 24 of the
Code. It does not include an estate or a trust, the provision of Sec. 60 of the Code to the contrary
notwithstanding.
(2) "Principal Residence" — shall refer to the dwelling house, including the land on which it is
situated, where the husband and wife or an unmarried individual, whether or not qualified as head of
family, and members of his family reside. Actual occupancy of such principal residence shall not be
considered interrupted or abandoned by reason of the individual's temporary absence therefrom due to
travel or studies or work abroad or such other similar circumstances. Such principal residence must be
characterized by permanency in that it must be the dwelling house to which, whenever absent, the said
individual intends to return.
(3) "Fully Utilized" — shall mean that the taxpayer has actually commenced with the construction of
his new principal residence or has actually entered into a contract for the purchase of his new principal
residence within eighteen (18) calendar months from the date of sale, exchange or disposition thereof,
with the intention of using the entire proceeds of sale for the acquisition or construction of his new
principal residence. Provided, that any expense paid for by the seller in effecting the sale, i.e.,
documentary stamp tax, transfer fees, broker's commission, if any, shall be considered as part of the
amount utilized.

SECTION 3. Conditions of Exemption. — The general provisions of the Code to the contrary
notwithstanding, capital gains presumed to have been realized from the sale, exchange or disposition by
a natural person of his principal residence shall not be imposed with income tax, including the six percent
(6%) capital gains tax, subject to the following conditions:
(1) Sworn Declaration Requirement. — He shall submit a Sworn Declaration (ANNEX A hereof) of his
intent to avail of the tax exemption herein provided which shall be filed with the aforementioned Revenue
District Office (RDO) having jurisdiction over the location of the principal residence within thirty (30) days
from the date of its sale, exchange or disposition, inclusive of the following:
(a) Duly Accomplished Capital Gains Tax Return (BIR Form No. 1706);
(b) Proof of payment of documentary stamp tax on conveyance of real property;
(c) A sworn statement from the Barangay Chairman that his principal residence is located within the
jurisdiction of that Barangay and has been his residence as of the date of sale, exchange or disposition
thereof;
(d) A duplicate original copy of the Deed of Conveyance of his Principal Residence;
(e) Photocopy of the Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT), in
case of a condominium unit (covering the principal residence sold, exchanged or disposed); and
(f) Latest Tax Declaration of the said principal residence (land and improvement).
(2) Post Reporting Requirement. — The proceeds from the sale, exchange or disposition of his
principal residence must be fully utilized in acquiring or constructing his new principal residence within
eighteen (18) calendar months from date of its sale, exchange or disposition. In order to show proof that
positive action was undertaken to utilize the proceeds for the acquisition or construction of his new
principal residence within the 18-month reglementary period, he shall submit to the RDO concerned,
within thirty (30) days from the lapse of the said period, the following documents:
(a) A sworn statement that the total proceeds from the sale of his old principal residence has been
actually utilized in the acquisition or construction of his new principal residence or, if the construction of
his new principal residence is still in progress, a sworn statement that such amount shall be fully utilized
to procure the necessary materials and pay for the cost of labor and other expenses for the construction
thereof;
(b) A certified statement from his architect or engineer, or both, showing the cost of materials and
labor for the construction of his new principal residence;
(c) A certified copy of the Building Permit issued by the Office of the Building Official of the City or
Municipality where his new principal residence shall be constructed, as well as photocopies of documents
(e.g. building specification plan, construction plans, construction cost estimates) submitted with his
application for said permit;
(d) In case his new principal residence is acquired by purchase, a duplicate original copy of the Deed
of Absolute Sale covering the purchase of his new principal residence.
(3) The tax exemption herein granted may be availed of only once every ten (10) years;
(4) The historical cost or adjusted basis of his old principal residence sold, exchanged or disposed
shall be carried over to the cost basis of his new principal residence; and
(5) If there is no full utilization of the proceeds of sale, exchange or disposition of his old principal
residence for the acquisition or construction of his new principal residence, he shall be liable for
deficiency capital gains tax which shall be computed in accordance with Sec. (4) hereof . Accordingly,
only a fractional part (which the utilized amount bears to the gross selling price) of the historical cost of
the old principal residence sold shall be carried over to the cost basis of the new principal residence.

SECTION 4. Determination of Capital Gains Tax Due if the Proceeds of Sale, Exchange or Disposition
of his Principal Residence has not Been Fully Utilized. — In a case where the entire proceeds of sale is
not utilized for the purchase or construction of a new principal residence, the capital gains tax shall attach.
In computing the capital gains tax due on the sale of the principal residence, we follow the following steps:
(1) Determine the percentage (%) of non-utilization applying the formula:
Unutilized Portion of GSP
-------------------------- = Percentage (%) of Non-Utilization
GSP
(2) Multiply the % of non-utilization by the GSP or FMV, whichever is higher.
(3) Multiply the product in item (2) above by the rate of six percent (6%).
If the seller fails to utilize the proceeds of sale or disposition in full or in part within the 18-month
reglementary period, his right of exemption from the capital gains tax did not arise to the extent of the
unutilized amount, in which event, the tax due thereon shall immediately become due and demandable on
the 31st day after the date of the sale, exchange or disposition of principal residence. As such, he shall
file his capital gains tax return covering the sale, exchange or disposition of his principal residence and
pay the deficiency capital gains tax inclusive of the twenty five percent (25%) surcharge for late payment
of the tax plus twenty percent (20%) delinquency interest per annum incident to such late payment
computed on the basis of the basic tax assessed. The interest shall be imposed from the thirty-first (31st)
day after the date of the sale of principal residence until the date of payment, provided, that the date of
sale shall mean the date of notarization of the document of sale, exchange, or disposition of principal
residence.

Illustrations:
(1) In case the proceeds from the sale, exchange or disposition of his principal residence has been
fully utilized to acquire his new principal residence. — Assume that Mr. Arnold Buendia acquired his
principal residence in 1986 at a cost of P1,000,000.00. He sold the said property on January 1, 1998, with
a fair market value of P5,000,000.00, for a consideration of P4,000,000.00. Within the 18-month
reglementary period, he purchased his new principal residence at a cost of P7,000,000.00.

Computations:
Historical cost of old principal residence P1,000,000.00
Gross selling price (GSP) P4,000,000.00
Fair market value (FMV) of old principal residence
at the time of sale P5,000,000.00
Cost to acquire new principal residence P7,000,000.00
(a) To compute for the capital gains tax due. — In this case, Mr. Buendia shall be exempt from the
capital gains tax otherwise due from him since the entire proceeds of the sale has been fully utilized to
acquire his new principal residence.
(b) To compute for the basis of the new principal residence. — The historical cost or adjusted cost
basis of his old principal residence shall be carried over to the cost basis of his new principal residence,
computed as follows:
Historical cost of old principal residence P1,000,000.00
Add: Additional cost to acquire new principal
residence
Cost to acquire his new principal residence P7,000,000.00
Less: GSP of his old principal residence (4,000,000.00) 3,000,000.00
----------------- ----------------
Adjusted Cost Basis of New Principal Residence P4,000,000.00
==========
(2) In case the fair market value of the old principal residence is equal to the cost to acquire the new
principal residence. — Using the above illustration, if for example, instead of P7,000,000.00, Mr. Buendia
was able to acquire his new principal residence at a cost of P4,000,000.00, which is equal to the gross
selling price of his old principal residence.

(a) To compute for the capital gains tax due. — In this case, Mr. Buendia is still exempt from the
payment of the capital gains tax otherwise due from him because there has been full utilization of the
proceeds from the sale of his old principal residence within the 18-month reglementary period.
(b) To compute for the basis of his new principal residence. — Since the fair market value of his old
principal residence is equal to the cost to acquire his new principal residence, the historical cost of his old
principal residence shall be the basis of his new principal residence, computed as follows:

Historical cost of his old principal residence P1,000,000.00


Add: Additional cost to acquire new principal
residence:
Cost to acquire new principal residence P4,000,000.00
Less: GSP of old principal residence (4,000,000.00) -
----------------- ----------------
Adjusted Cost Basis of New Principal Residence P1,000,000.00
==========
(3) In case the proceeds from the sale of his old principal residence has not been fully utilized to
acquire his new principal residence. — If Mr. Buendia acquired his new principal residence within the 18-
month reglementary period but did not, however, utilize the entire proceeds of the sale in acquiring his
new principal residence because he only used P3,000,000 thereof in acquiring his new principal
residence, that portion of the gross selling price not utilized in the acquisition or construction of his new
principal residence shall be subject to capital gains tax.

Computations:

Historical cost of old principal residence P1,000,000.00


Gross selling price (GSP) P4,000,000.00
Fair market value (FMV) of old principal residence P5,000,000.00
Cost to acquire new principal residence P3,000,000.00
(a) To compute for the capital gains tax due. — To compute for the capital gains tax due, the
following formula shall be used in determining capital gains tax due on the taxable portion pertaining to
the unutilized amount of the proceeds of sale:
Unutilized Portion of GSP
of Old Principal Residence (GSP or FMV of Old Principal
----------------------------------------- x Residence, whichever is higher) x Capital gains tax rate
GSP of Old Principal Residence
= (P4,000,000 - P3,000,000)
------------------------------- x P5,000,000 x 6%
P4,000,000
= P1,000,000
------------------------------- x P5,000,000 x 6%
P4,000,000
= 25% x P5,000,000 x 6%
= P75,000.00
========

The capital gains tax due from Mr. Buendia for the said unutilized portion shall be P75,000 out of the total
of P300,000 capital gains tax otherwise due from the sale of his old principal residence (i.e., P5,000,000 x
6% = P300,000). However, he shall be exempt from capital gains tax to the extent allocable to that portion
which he actually utilized to acquire his new principal residence (i.e., capital gains tax portion of
P225,000), as shown below:

Fair market value of the principal residence sold P5,000,000


-------------
Capital gains tax otherwise due thereon (6%) P300,000
Capital gains tax allocable to the unutilized portion 75,000
-------------
Amount of exempt capital gains tax allocable to the utilized
portion of proceeds from sale (P3,000,000/P4,000,000 = 75% P225,000
times P300,000) ========
(b) To compute for the basis of the new principal residence. — In this case, since the entire proceeds
was not utilized to acquire the new principal residence, the cost basis to be carried over to his new
principal residence shall be equivalent to the proportion of the utilized amount over the GSP applied on
the historical cost, computed as follows:
Historical cost of old principal residence P1,000,000
Less: Portion of historical cost pertaining to the tax
paid unutilized amount (25%) (250,000)
-------------
Adjusted Cost Basis of New Principal Residence P750,000
========
or another way for computing the adjusted cost basis of the new principal residence is by using this
formula:
Utilized Amount
of GSP
-------------------------- x Historical Cost = Amount to be Carried Over
GSP of Old of Old Principal to the Cost Basis of New
Principal Residence Residence Principal Residence
applied as follows:
(P4,000,000 - P1,000,000)
-------------------------------- x P1,000,000 = P750,000
P4,000,000 =======

SECTION 5. Disposition of the Principal Residence in Exchange for Property Other than Cash. — (1) If
the individual taxpayer's principal residence is disposed in exchange for a condominium unit, the
disposition of the taxpayer's principal residence shall not be subjected to the capital gains tax herein
prescribed, provided that the said condominium unit received in the exchange shall be used by the
taxpayer-transferor as his new principal residence. In this particular case, the exempt provision of Sec.
24(D)(2) of the 1997 Tax Code shall only apply to the transferor of the principal residence and not to the
transferee who shall be subject to the capital gains tax in case his/its condominium unit is treated as
capital asset or to the income tax which shall be withheld in accordance with Sec. 2.57.2(J) of Revenue
Regulations No. 2-98, as amended, in case the condominium unit is treated as an ordinary asset.
However, if the condominium unit is similarly treated by an individual owner as his principal residence,
then the same shall also be covered by the exempt provision under Sec. 24(D)(2) of the same Code.
Example: Mr. Buendia assigned and conveyed his principal residence to ABC Realty Corporation in
exchange for a condominium unit which Mr. Buendia will use as his new principal residence. Thus, Mr.
Buendia is exempt the from imposition of capital gains tax on the exchange of his new principal residence
while ABC Realty Corporation, on the other hand, shall be subject to income tax, on its exchange of the
condominium unit.
(2) If the said taxpayer's principal residence is disposed of in exchange for a parcel of land and such
land received in the exchange shall be used for the construction of his new principal residence, no income
tax or capital gains tax shall be imposed upon the owner of the principal residence. However, the owner
of the land shall be subject to capital gains tax or to income tax, as the case may be.
(3) If in the acquisition of his new principal residence, the taxpayer exchanged his old principal
residence plus cash or other property, the unutilized portion subject to capital gains tax shall be
determined by the difference between the total consideration made on the conveyance of old principal
residence transferred (FMV of old principal residence + cash or FMV of other property) and the total
consideration received (FMV of new principal residence) for such exchange.
Example: Mr. Buendia assigned and conveyed his principal residence with fair market value of
P4,000,000 and in addition paid P2,000,000 to acquire as new principal residence the principal residence
of Mr. Yabut. Mr. Yabut, on the other hand, conveyed his principal residence to Mr. Buendia with fair
market value of P5,000,000, with the intention of making the property received from Mr. Buendia as his
new principal residence. The historical cost of the old principal residence of Mr. Buendia is P1,000,000
while the historical cost of the old principal residence of Mr. Yabut is P500,000.
(a) Computation of capital gains tax due on the exchange of property by Mr. Buendia — No capital
gains tax is due from Mr. Buendia for the reason that there has been full utilization of the value of his old
principal residence exchanged where in addition to fair market value of his old principal residence of
P4,000,000, he still paid cash of P2,000,000 to acquire as his new principal residence the old principal
residence of Mr. Yabut valued at P5,000,000.
(b) Computation of cost basis of the new principal residence of Mr. Buendia —
Historical cost of his old principal residence P1,000,000.00
Add: Additional cost to acquire new principal
residence:
Cost to acquire new principal residence P6,000,000.00
Less: FMV of old principal residence at the time of (4,000,000.00) 2,000,000.00
exchange ----------------- ----------------
Adjusted Cost Basis of New Principal Residence P3,000,000.00
==========
(c) Computation of capital gains tax due from Mr. Yabut — Mr. Yabut shall be liable to capital gains
tax to the extent of the unutilized portion of the total value of consideration received in the exchange
which is computed as follows:
= (P6,000,000 - P5,000,000)
------------------------------- x P6,000,000 x 6%
P6,000,000
= P1,000,000
------------------------------- x P6,000,000 x 6%
P6,000,000
= P60,000.00
========
(d) Computation of the adjusted cost basis of the new principal residence of Mr. Yabut — In
computing for the adjusted cost basis of the new principal residence of Mr. Yabut, only that portion of
historical cost corresponding to the unutilized portion of the value received shall be considered. In this
case, the adjusted cost basis of the new principal residence is computed as follows:
= P5,000,000
-------------- x P500,000
P6,000,000
= P416,667
=======
In order to avail of the tax exemption from capital gains tax with respect to such exchanges, the aforesaid
taxpayer is nevertheless required to acquire his new principal residence within the eighteen (18) month
reglementary period, otherwise, he shall be liable to pay the capital gains tax on the disposition of his
principal residence.
In all cases of exchange of principal residence for another real property, the liability of documentary
stamp tax provided under Sec. 196 of the 1997 Code shall accrue to both parties involved in the
exchange.

SECTION 6. Issuance of Certificate Authorizing Registration (CAR) or Tax Clearance Certificate


(TCL). — The taxpayer's filing of the Sworn Declaration of Intent to avail of the capital gains tax
exemption in the manner prescribed under Sec. (3) hereof shall be a sufficient basis of the RDO to
approve and issue the CAR or TCL of the principal residence sold, exchanged or disposed by the
aforesaid taxpayer. Said CAR or TCL shall state that on the sale, exchange or disposition of the
taxpayer's principal residence is exempt from capital gains tax pursuant to Sec. 24(D)(2) of the Code.

SECTION 7. Repealing Clause. — All existing rules and regulations or parts thereof which are
inconsistent with the provisions of these Regulations are hereby amended, modified or repealed
accordingly.

SECTION 8. Effectivity. — The provisions of these Regulations shall take effect fifteen (15) days after
publication in the Official Gazette or in any newspaper of general circulation without prejudice, however,
to those persons who have availed of the capital gains tax exemption on account of such sale or
disposition during the period from January 1, 1998 to the date of effectivity of these Regulations:
Provided, however, that such persons shall be required to comply with the documentary requirements
herein prescribed within thirty (30) days from date of effectivity hereof.

(SGD.) EDGARDO B. ESPIRITU


Secretary of Finance

Recommending Approval:
(SGD.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue

REVENUE REGULATIONS NO. 14-00


SUBJECT : Amending Sections 2(2), 3 and 6 of Revenue Regulations No. 13-99 vis-a-vis
Sale, Exchange or Disposition, by a Natural Person, of His "Principal Residence"

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. — Pursuant to the provisions of Section 244, in relation to Section 24 (D) (2) of
the National Internal Revenue Code of 1997 , these regulations are hereby promulgated in order to
streamline and make more efficient the collection of the capital gains tax, if any, presumed to have been
realized from the sale, exchange or disposition, by a natural person, of his "Principal Residence."

SECTION 2. Amendments. —
2.1. Section 2 (2) of Revenue Regulations No. 13-99 is hereby amended, to read as follows:
"(2) Principal Residence. — (a) The term "Principal Residence" shall refer to the dwelling house,
including the land on which it is situated, where the husband and wife or an unmarried individual, whether
or not qualified as head of family, and members of his family reside. Actual occupancy of such principal
residence shall not be considered interrupted or abandoned by reason of the individual's temporary
absence therefrom due to travel or studies or work abroad or such other similar circumstances. Such
principal residence must be characterized by permanency in that it must be the dwelling house in which,
whenever absent, the said individual intends to return.
"(b) Where ownership of the land and the dwelling house thereon belongs to different persons, e.g.,
where the land is leased to the dwelling house owner, only the dwelling house shall be treated as
Principal Residence of the dwelling house owner. Thus, if the said land and the dwelling house thereon
be jointly sold or disposed by the said owners, only the-sale or disposition of the dwelling house shall be
entitled to the benefit of exemption from the capital gains tax herein prescribed: Provided, however, that
where both the owner of the land and owner of the dwelling house actually reside in the said dwelling
house, then both the said land and dwelling house shall be treated as their Principal Residence (e.g.,
owner of the land is the parent while owner of the house is his child, or vice versa).
"(c) Where the land and the dwelling house thereon be owned by several co-owners, e.g., inherited by
two or more heirs through hereditary succession, and where the said property is actually used as
Principal Residence by one or more of the said co-owners, including the members of .his/their family, the
said property shall be treated as the Principal Residence of the co-owner/s actually occupying and using
the same as his/their Principal Residence but to the extent of his/their proportionate share in the value of
the principal residence. Conversely, the capital gains tax exemption benefit herein prescribed shall not
apply in respect of the other co-owners who do not actually use and occupy the same as their Principal
Residence.
"(d) The residential address shown in the latest income tax return filed by the vendor/transferor
immediately preceding the date of sale of the said real property shall be treated, for purposes of these
Regulations, as a conclusive presumption about his true residential address, the certification of the
Barangay Chairman, or Building Administrator (in case of a condominium unit), to the contrary
notwithstanding, in accordance with the doctrine of admission against interest or the principle of estoppel
(e.g., if the property was sold on May 1, 2000, the vendor's annual income tax return for the year 1999,
which he filed on or before April 15, 2000, showing his residential address, shall be treated as a
conclusive presumption that his true residential address is that which is shown in his aforesaid income tax
return). If the vendor is exempt from filing any tax return, in which case, he has no tax record immediately
prior to the sale of his property, then the aforementioned certification from the Barangay Chairman or
Building Administrator, as the case may be, shall suffice."
2.2. Section 3 of Revenue Regulations No. 13-99 is hereby amended, to read as follows:

."SEC. 3. Conditions for Exemption. — The general provisions of the Code to the contrary
notwithstanding, capital gains presumed to have been realized from the sale, exchange or disposition by
a natural person of his Principal Residence shall not be imposed with six percent (6%) capital gains tax,
subject to compliance with the following:

"(1) Escrow Agreement. — The six percent (6%) capital gains tax otherwise due on the presumed
capital gains derived from the sale, exchange or disposition of his Principal Residence shall be deposited
in cash or manager's check in interest-bearing account with an Authorized Agent Bank (AAB) under an
Escrow Agreement (ANNEX A hereof) between the concerned Revenue District Officer, the
Seller/Transferor and the AAB to the effect that the amount so deposited, including its interest yield, shall
only be released to such Seller/Transferor upon certification by the said RDO that the proceeds of sale or
disposition thereof has, in fact, been utilized in the acquisition or construction of the Seller/Transferor's
new Principal Residence within eighteen (18) calendar months from date of the said sale or disposition.
The date of sale or disposition of a property refers to the date of notarization of the document evidencing
the transfer of said property. In general, the term "Escrow" means "A scroll, writing or deed, delivered by
the grantor, promisor or obligor into the hands of a third person, to be held by the latter until the
happening of a contingency or performance of a condition, and then by him delivered to the grantee,
promisee or obligee."
"(2) Capital Gains Tax Return. — The Seller/Transferor shall file, in duplicate, his Capital Gains Tax
Return (BIR FORM No. 1706) covering the sale or disposition of his Principal Residence with the
concerned .Revenue District Office within thirty (30) days from date of its sale or disposition: Provided,
however, that the Seller/Transferor shall not be required to pay any capital gains tax during the 18-month
period on the sale of his principal residence duly established as such. Provided, further, that for purposes
of the capital gains tax otherwise due on the sale, exchange or disposition of the said Principal
Residence, the execution of the Escrow Agreement referred to in the immediately preceding Section 3 (1)
hereof shall be considered sufficient.
"The following shall be submitted with the Capital Gains Tax Return herein required to be filed:
(a) Proof of payment of the documentary stamp tax imposed under Sec. 196 of the Tax Code of
1997 on the deed of sale or conveyance of the said "Principal Residence;"
(b) A sworn statement from the Barangay Chairman that the taxpayer's Principal Residence is
located within the jurisdiction of that Barangay and that the same has been his residence immediately
prior to the date of its sale or disposition: Provided, however, that if the taxpayer's Principal Residence
sold or disposed is a condominium unit, in lieu of the said Barangay Chairman, the certification shall be
issued by the Building Administrator of the Condominium building.
(c) A duplicate original copy of the Deed of Conveyance of his Principal Residence;
(d) A certified xerox copy of the Transfer Certificate of Title (TCT) or Condominium Certificate of Title
(CCT), in case of a condominium unit, covering the Principal Residence sold or disposed;
(e) A certified xerox copy of the latest Tax Declaration covering the said Principal Residence (land
and improvement); and
(f) If the building or improvement thereon has been constructed on or after the year 1990, the
Building Permit or Occupancy Permit issued by the concerned city or municipality, showing the amount of
the construction cost thereof.
"(3) Post Reporting Requirement. — The proceeds from the sale, exchange or disposition of his old
Principal Residence must be fully utilized in acquiring or constructing his new Principal Residence within
eighteen (18) calendar months from date of its sale, exchange or disposition. in order to show proof that
positive action was undertaken to utilize the proceeds for the acquisition or construction of his new
Principal Residence within the 18-month reglementary period, he shall submit to the RDO concerned,
within thirty (30) days from the lapse of the said period, the following documents:
(a) A sworn statement that the total proceeds from the sale or disposition of his old Principal
Residence has been actually utilized in the acquisition or construction of his new Principal Residence or,
if the construction of his new Principal Residence is still in progress, a sworn statement that such amount
shall be fully utilized to procure the necessary materials and pay for the cost of labor and other expenses
for the construction thereof;
(b) A certified statement from his architect or engineer, or both, showing the cost of materials and
labor for the construction of his new Principal Residence;
(c) A certified copy of the Building Permit issued by the Office of the Building Official of the City or
Municipality where his new Principal Residence shall be constructed as well as xerox copies of
documents (e.g., building specification plan, construction plans, or construction cost estimates) submitted
with his application for the said Building Permit on which computation of the amount of the building
license fee has been based;
(d) In case his new Principal Residence is acquired by purchase, a duplicate original copy of the
Deed of Absolute Sale covering the purchase of his new Principal Residence.
"(4) Release from the Escrow Agreement. — Upon a showing, based on the foregoing documents,
that the proceeds of sale, exchange or disposition of his old Principal Residence have already been fully
utilized in the acquisition or construction of his new Principal Residence, the concerned Revenue District
Officer shall, within fifteen (15) days from date of submission by the Seller/Transferor of the foregoing
documents, release the Escrow on the aforesaid bank deposit in favor of the Seller/Transferor (ANNEX B
hereof).
"(5) Limitation on Tax Exemption Privilege. — The tax exemption herein granted may be availed of
only once every ten (10) years;
"(6) Cost Basis of the New "Principal Residence". — The historical cost or adjusted cost basis of his
old Principal Residence sold, exchanged or disposed shall be carried over to the cost basis of his new
Principal Residence; and
"(7) Assessment for Deficiency Capital Gains Tax; Application of the Escrowed Bank Deposit Against
the Deficiency Tax. — If the Seller/Transferor fails to submit documentary evidence within thirty (30) days
after the lapse of the aforesaid 18-month period, showing that he has utilized the proceeds of sale,
exchange or disposition of his old Principal Residence to acquire or construct his new Principal
Residence, it shall be presumed that he did not, in fact, utilize the aforesaid proceeds of sale for the
construction or acquisition of his new Principal Residence, in which case, he shall be treated deficient in
the payment of his capital gains tax from the sale or disposition of his aforesaid Principal Residence, and
shall be accordingly be assessed for deficiency capital gains tax, inclusive of the 20% interest per annum,
pursuant to the provisions of Section 228 of the Code, as implemented by Revenue Regulations No. 12-
99 , in relation to Section 249 of the said Code.
Pursuant to the provisions of Revenue Regulations No. 12-99, the taxpayer shall be issued with the
required Post Reporting Notice informing him, in writing, of the aforementioned facts, in order that he may
present his side of the case through informal conference, and the required Preliminary Assessment
Notice, before issuance of the Formal Assessment Notice. If, at this point in time, the escrowed tax
money is still in the custody of the Depository Bank, the full amount thereof, including its interest earnings,
shall be applied in computing for the taxpayer's deficiency capital gains tax. Upon the time that the said
deficiency tax assessment has become final and executory, the deposit in escrow, inclusive of its interest
earnings, shall be forfeited and applied against the taxpayer's deficiency capital gains tax liability. The
depository Bank shall forthwith be informed of this action, and shall, upon demand in writing, by the
Commissioner or his duly authorized representative (ANNEX C hereof), turn over the money for
application in payment of the taxpayer's deficiency tax liability. If the same is insufficient to cover the
entire amount assessed, the seller/transferor shall remain liable for the remaining balance of the
assessment. On the other hand, the excess of the deposit in escrow, if any, shall forthwith be returned to
the Seller/Transferor, by the Bank, upon written authorization from the Commissioner or his duly
authorized representative.
"(8) Partial Utilization of the Proceeds of Sales Exchange or Disposition. — If there is no full utilization
of the proceeds of sale, exchange or disposition of his old Principal Residence for the acquisition or
construction of his new Principal Residence, he shall be liable for deficiency capital gains tax, inclusive of
20% interest per annum, computed from the 31st day after the date of sale or disposition of the said old
Principal Residence."
2.3. Section 6 of Revenue Regulations No. 13-99 is hereby amended, to read as follows:
"SEC 6.Issuance of Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCL). — The
seller/transferor's compliance with the preliminary conditions for exemption under Sec. 3(1) and (2) of
these Regulations shall be sufficient basis for the RDO to approve and issue the CAR or TCL of the
principal residence sold, exchanged or disposed by the aforesaid taxpayer. Said CAR or TCL shall state
that the said sale; exchange or disposition of the taxpayer's principal residence is exempt from capital
gains tax pursuant to Sec. 24 (D)(2) of the Code but subject to compliance with the post-reporting
requirements imposed under Sec. 3(3) of these Regulations.
SECTION 3. Penalty Clause. — (1) Any Barangay Chairman, or Building Administrator, as the case
may be, who shall falsely certify that the property sold or disposed is the vendor/transferor's Principal
Residence when, in truth and in fact, it is not, shall be punished under the penalty of perjury, at the
discretion of the Court.
(2) Any other violation of the provisions of these Regulations shall, upon conviction for each act or
omission, be punishable under Section 275 of the Code by a fine of not more than One Thousand Pesos
(P1,000.00) or imprisonment of not more than six (6) months, or both, at the discretion of the Court.
SECTION 4. Repealing Clause. — Any revenue issuance, if inconsistent herewith, shall be considered
revoked, amended, or modified accordingly.
SECTION 5. Effectivity Clause. — These Regulations shall take effect fifteen (15) days after its
publication in any newspaper of general circulation.

(SGD.) JOSE T. PARDO


Secretary of Finance

Recommending Approval:

(SGD.) DAKILA B. FONACIER


Commissioner of Internal Revenue

REVENUE REGULATIONS NO. 006-08


SUBJECT : Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter,
Exchange or Other Disposition of Shares of Stock Held as Capital Assets

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. — Pursuant to Section 244, in relation to Sections 24 (C), 25 (A) (3), 25 (B), 27
(D) (2), 28 (A) (7) (c), 28 (B) (5) (c), 34 (D) (4) (5), 38, 40, and Section 127 (A) and (B) of the 1997
National Internal Revenue Code (Tax Code), as amended, these Regulations are hereby promulgated in
order to harmonize and consolidate the rules relative to the imposition of tax for the sale, barter,
exchange or other disposition of shares of stock of domestic corporation that are listed and traded
through the Local Stock Exchange, or disposition of shares through Initial Public Offering (IPO) or
disposition of shares not traded through the Local Stock Exchange.

SECTION 2. Definition of Terms. — For purposes of these Regulations, the following definitions of
words and phrases are hereby adopted:

(a) "Stock Classified as Capital Assets" means all stocks and securities held by taxpayers other than
dealers in securities.

(b) "Dealer in securities" means a merchant of stocks or securities, whether an individual, partnership
or corporation, with an established place of business, regularly engaged in the purchase of securities and
the resale thereof to customers; that is, one who, as merchant, buys securities and re-sells them to
customers with a view to the gains and profits that may be derived therefrom. "Dealer in securities"
means any person who buys and sells securities for his/her own account in the ordinary course of
business (Sec. 3.4, SRC).

(c) "Shares of Stock" shall include shares of stock of a corporation; warrants and/or options to
purchase shares of stock; as well as units of participation in a partnership (except general professional
partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations, associations,
and recreation or amusement clubs (such as golf, polo or similar clubs); and mutual fund certificates.

(d) "Option" refers to an option to acquire stock or an option to acquire such an option and each one
of a series of options to acquire stock. "Options" are contracts that give the buyer the right, but not the
obligation, to buy or sell an underlying security at a predetermined price, called the exercise or strike
price, on or before a predetermined date, called the expiry date, which can only be extended by the
Commission upon stockholders' approval. (SRC Rule 3 (1) (F) (1))

(e) "Shareholder" shall include holders of a share/s of stock, warrants and/or options to purchase
shares of stock of a corporation, as well as a holder of a unit of participation in a partnership (except
general professional partnerships), in a joint stock company, a joint account, a taxable joint venture, a
member of an association, recreation or amusement club (such as golf, polo or similar clubs) and a holder
of a mutual fund certificate, a member in an association, joint stock company or insurance company.

(f) "Stockbroker" includes all persons whose business it is, for other brokers, to negotiate purchases
or sales of stocks, or engaged in the business of effecting transactions in securities for the account of
others but does not include a bank or underwriters for one or more investment companies as defined in
the Investment Company Act. "Broker" is a person engaged in the business of buying and selling
securities for the account of others. (Sec. 3.3, SRC)

(g) "Local Stock Exchange" refers to any domestic organization, association, or group of persons,
whether incorporated or unincorporated, licensed or unlicensed, which constitutes, maintains, or provides
a market place or facilities for bringing together purchasers and sellers of stocks, and includes the market
place and the market facilities maintained by such exchange. "Exchange" is an organized domestic
marketplace or facility that brings together buyers and sellers and executes trades of securities and/or
commodities, duly registered with the Securities and Exchange Commission. (Sec. 3.7, SRC)
(h) "Gross selling price" refers to the total amount of money or its equivalent which the purchaser
pays the seller as consideration for the shares of stock.

(i) "Gross value in money" means the "fair market value". In the case of shares traded thru the stock
exchange, "fair market value" shall consist of the actual selling price at which the transaction was
executed in the trading system and/or facilities of the Local Stock Exchange.

(j) "Initial Public Offering (IPO)" refers to a public offering of shares of stock made for the first time in
the Local Stock Exchange.

(k) "Primary Offering" refers to the original sale made to the investing public by the issuer corporation
of its unissued Shares of Stock.

(l) "Secondary Offering" refers to an offer for sale to the investing public by the existing shareholders
of their securities which is conducted during an IPO or a follow-on/follow-through offering.

(m) "Follow-on/Follow-through Offering of Shares" refers to an offering of shares to the investing


public subsequent to an IPO.

(n) "Shares Listed and Traded through the Local Stock Exchange", for purposes of these
Regulations, refers to all sales, trades or transactions of listed Shares of Stock executed through the
trading system and/or facilities of the Local Stock Exchange. This term includes block sale or other types
of sales, trades or transactions in the Local Stock Exchange and executed through the trading system
and/or facilities of the Local Stock Exchange in accordance with the rules of the Local Stock Exchange as
approved by the Securities and Exchange Commission.

(o) "Net Capital Gain" means the excess of the gains from sales or exchanges of capital assets over
the losses from such sales or exchanges.

(p) "Net Capital Loss" means the excess of the losses from sales or exchanges of capital assets over
the gains from such sales or exchanges.

(q) "Closely-held Corporation" means corporation at least fifty percent (50%) in value of the
outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of
stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals.
Rules in Determining Whether the Corporation is a Closely-Held Corporation insofar as such
Determination is based on Stock Ownership:

(q.1) Stock not owned by individuals. — Stock owned directly or indirectly by or for a corporation,
partnership, estate, or trust shall be considered as being owned proportionately by its shareholders,
partners, or beneficiaries.
(q.2) Family and partnership ownerships. — An individual shall be considered as owning the stock
owned, directly or indirectly, by or for family, or by or for his partner. For purposes of this paragraph, the
family of an individual includes only his brothers and sisters (whether by the whole or half blood), spouse,
ancestors, and lineal descendants.
(q.3) Option. — If any person has an option to acquire stock, such stock shall be considered as owned
by such person. For purposes of this paragraph, an option to acquire such an option and each one of a
series of options shall be considered as an option to acquire such stock.
(q.4) Constructive ownership as actual ownership. — Stock constructively-owned by reason of the
application of paragraph (q.1) or (q.3) shall, for purposes of applying paragraph (q.1) or (q.2), be treated
as actually owned by such person; but stock constructively owned by the individual by reason of the
application of paragraph (q.2) hereof shall not be treated as owned by him for purposes of again applying
such paragraph in order to make another constructive owner of such stock.

(r) "Family of an individual" includes only his brothers and sisters (whether by the whole or half-
blood), spouse, ancestors, and lineal descendants.
(s) "Mutual Fund Company" means an open-end and close-end investment company as defined
under the Investment Company Act.

(t) "Acquired" as used in Sec. 7 (c.6) of these Regulations when dealing with wash sales of shares of
stock, means acquired by purchase or by an exchange upon which the entire amount of gain or loss was
recognized by law, and comprehends cases where the taxpayer has entered into a contract or option
within the sixty-one-day period to acquire by purchase or by such an exchange.

(u) "Capital Asset" 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 of the Tax Code, as amended, or real property
used in trade or business of the taxpayer.

(v) "Book Value per Share" refers to the value per share computed by dividing the total Stockholders'
Equity of a corporation or net assets of the company by the number of outstanding shares or units of
participation in a company. In case there are preferred shares as well as common shares, the book value
per common share is computed by deducting the liquidation value of the preferred shares from the total
equity of the corporation and dividing the result by the number of common shares outstanding as of
balance sheet date. The liquidation value of the preferred shares is equal to the redemption price as of
balance sheet date, including any premium and cumulative preferred dividends in arrears.

(w) "Treasury Shares" are shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase, redemption which is not for cancellation,
donation or through some other lawful means. Such shares may again be disposed of for a reasonable
price fixed by the board of directors.

(x) "Redeemed Shares" are shares bought back by the issuing corporation for the purpose of
retirement or cancellation.

(y) "Acquisition Cost" shall include the purchase price, tax assumed and the commission paid.

(z) "Shares Considered as Worthless" refers to shares when offered for sale or requested for share
redemption, no amount can be realized by the owner of the share.

SECTION 3. Persons Liable to the Tax. — The following sellers or transferors of stock are liable to the
tax provided for in Sec. 5 of these Regulations:

(a) Individual taxpayer, whether citizen or alien;


(b) Corporate taxpayer, whether domestic or foreign; and
(c) Other taxpayers not falling under (a) and (b) above, such as estates, trusts, trust funds and
pension funds, among others.

SECTION 4. Persons Not Liable to the Tax. — The taxes imposed herein shall not apply to the
following:

(a) Dealers in securities;


(b) Investors in shares of stock in a mutual fund company, as defined in Section 22 (BB) of the Tax
Code, as amended, and Sec. 2 (s) of these Regulations, in connection with the gains realized by said
investor upon redemption of said shares of stock in a mutual fund company; and
(c) All other persons, whether natural or juridical, who are specifically exempt from national internal
revenue taxes under existing investment incentives and other special laws.
SECTION 5. Sale, Barter or Exchange of Shares of Stock Listed and Traded Through the Local Stock
Exchange. — There shall be levied, assessed and collected on every sale, barter, exchange or other
disposition of Shares of Stock Listed and Traded through the Local Stock Exchange other than the sale
by a dealer of securities, under the following rules:

(a) Tax Rate. — A stock transaction tax at the rate of one-half of one percent (1/2 of 1%) based on
the amount determined in subsection (b) hereunder.
(b) Tax Base. — Gross selling price or gross value in money of the shares of stock sold, bartered,
exchanged or otherwise disposed which shall be assumed and paid by the seller or transferor through the
remittance of the stock transaction tax by the seller or transferor's broker.

SECTION 6. Sale, Barter or Exchange, or Issuance of Shares of Stock Through IPO. — There shall be
levied, assessed and collected on every sale, barter, exchange or other disposition through initial public
offering (IPO) of shares of stock in closely held corporations, as defined in Sec. 2 (q) hereof, under the
following rules:

(a) Tax Rates. — A tax at the rates provided hereunder shall be imposed based on subsection (b)
hereof in accordance with the proportion of shares of stock sold, bartered, exchanged or otherwise
disposed to the total outstanding shares of stock after the listing in the Local Stock Exchange:
Proportion of Disposed Shares to Outstanding Shares Tax Rate
Up to twenty-five percent (25%) 4%
Over twenty-five percent (25%) but not over
thirty three and one-third percent (33 1/3%) 2%
Over thirty-three and one third percent (33 1/3%)1%
(b) Tax Base. — Gross selling price or gross value in money of the shares of stock sold, bartered,
exchanged or otherwise disposed of.
(c) Determination of the Persons Liable to Pay the Tax. —
(c.1) Primary Offering. — The tax herein imposed shall be paid by the issuer corporation with respect
to the Shares of Stock corresponding to the Primary Offering.
(c.2) Secondary Offering. — The tax herein imposed shall be paid by the selling shareholder(s) with
respect to the Shares of Stock corresponding to the Secondary Offering.
(c.3) Illustration. — RFB Corporation, a closely-held corporation, has an authorized capital stock of
100,000,000 shares with par value of Php1.00/share as of January 1, 2008.
Of the 100,000,000 authorized shares, 25,000,000 thereof is subscribed and fully paid up by the following
stockholders:

Mr. Estoy B. Zabala 5,000,000


Mrs. Rowena V. Posadas 5,000,000
Mr. Conrado G. Cruz 5,000,000
Mr. Benedict O. Sison 5,000,000
Mrs. Linda O. Evangelista 5,000,000
–––––––––
Total Shares Outstanding 25,000,000
========

RFB Corporation finally decides to conduct an IPO and initially offers 25,000,000 of its unissued shares to
the investing public. After the IPO in March 2008, RFB Corporation's total issued shares increased from
25,000,000 to 50,000,000 shares.

At the IPO, one of the existing stockholders, Mrs. Linda O. Evangelista, has likewise decided to sell her
entire 5,000,000 shares to the public. Thus, 25,000,000 shares have been offered in the primary offering
and 5,000,000 shares in the secondary offering.

Computation of the percentage to be used. —


(i) Total Number of Shares Outstanding
Number of Shares issued by RFB prior to IPO 25,000,000 shares
Add: Number of Additional Shares Through
Primary Offering for IPO 25,000,000 shares
––––––––––
Total Shares Outstanding after Listing at the
Stock Exchange or IPO 50,000,000 shares
=========
(ii) Computation of Percentage Ratio to the Total Outstanding Shares
(ii.a) For Primary Offering:
Number of Shares offered by
RFB Corporation to the public 25,000,000 shares
Divide by the number of shares outstanding
after the Listing at the Stock Exchange 50,000,000 shares
–––––––––
Ratio of Percentage 50%
–––
Percentage Ratio is 50% which is over 33 1/3% so the Rate of Tax to be used for Primary Offering (IPO)
of shares is 1%.
(ii.b) For Secondary Offering:
Number of Shares offered by existing
Stockholder of RFB Corporation to the
public 5,000,000 shares
Divide by the number of shares outstanding
after the Listing at the Stock Exchange 50,000,000 shares
––––––––––
Ratio of Percentage 10%
–––
Percentage Ratio is 10% which is under 25% so the Rate of Tax to be used for Secondary Offering (IPO)
of shares is 4%.
(iii) Computation of the Tax
(iii.a) RFB Corporation newly issued shares
(25,000,000 shares x Php1.50/share x 1%) = Php375,000
(iii.b) Mrs. Linda O. Evangelista's shares
(5,000,000 shares x Php1.50/share x 4%) = Php300,000
If in June 2008, RFB Corporation again decides to increase capitalization by offering another
30,000,000 of unissued shares to the public at Php2.00/share consequently bringing the total issued
shares to 80,000,000 shares, such follow-on/follow-through sale which are shares issued subsequent to
IPO shall no longer be taxed pursuant to Section 6 hereof. The transaction, however, is subject to
Documentary Stamp Tax similar to the transaction covered by Primary Offering as well as Secondary
Offering of shares of stock.

Nonetheless, in case another existing shareholder decides to offer his existing shares to the
public subsequent to IPO, as in the above illustration, if Mr. Benedict O. Sison ever decides to sell his
5,000,000 shares to the public at Php2.00 per share (for the Php10,000,000 he received as consideration
for the shares he sold), he shall be taxed pursuant to Section 127 (A) of the Tax Code as implemented by
Sec. 5 of these Regulations which is 1/2 of 1% of the gross selling price or PhpP50,000 (i.e., 5,000,000
shares x Php2.00/share = Php10,000,000 x 1/2 of 1%).

SECTION 7. Sale, Barter or Exchange of Shares of Stock Not Traded Through a Local Stock
Exchange Pursuant to Secs. 24 (C), 25 (A)(3), 25 (B), 27 (D) (2), 28 (A) (7) (C), 28 (B) (5) (C) of The Tax
Code, as Amended. —

(a) Tax Rate. — The provisions of Sec. 39 (B) of the Tax Code, as amended, notwithstanding, a final
tax at the rates prescribed below is hereby imposed on the sale, barter or exchange of shares of stock not
traded through the Local Stock Exchange pursuant to Secs. 24 (C), 25 (A) (3), 25 (B), 27 (D) (2), 28 (A)
(7) (c), 28 (b) (5) (c) of the said Tax Code, as amended.
Amount of Capital Gain Tax Rate
Not over Php100,000 5%
On any amount in excess of Php100,000 10%
(b) Tax Base. — The tax imposed in Subsection (a) above shall be upon the net capital gains
realized during the taxable year from the sale, barter, exchange or disposition of shares of stock, except
shares sold or disposed of through the Local Stock Exchange which is covered by the provisions of Secs.
5 and 6 above.
(c) Determination of Amount and Recognition of Gain or Loss. —
(c.1) Determination of Selling Price. — In determining the selling price, the following rules shall apply:
(c.1.1) In the case of cash sale, the selling price shall be the total consideration per deed of sale.
(c.1.2) If the total consideration of the sale or disposition consists partly in money and partly in kind, the
selling price shall be sum of money and the fair market value of the property received.
(c.1.3) In the case of exchange, the selling price shall be the fair market value of the property received.
(c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater than
the amount of money and/or fair market value of the property received, the excess of the fair market value
of the shares of stock sold, bartered or exchanged over the amount of money and the fair market value of
the property, if any, received as consideration shall be deemed a gift subject to the donor's tax under Sec.
100 of the Tax Code, as amended.
(c.2) Definition of "fair market value" of the Shares of Stock. — For purposes of this Section, "fair
market value" of the shares of stock sold shall be:

(c.2.1) In the case of listed shares which were sold, transferred, or exchanged outside of the trading
system and/or facilities of the Local Stock Exchange, the closing price on the day when the shares are
sold, transferred, or exchanged. When no sale is made in the Local Stock Exchange on the day when the
listed shares are sold, transferred, or exchanged, the closing price on the day nearest to the date of sale,
transfer or exchange of the shares shall be the fair market value.
(c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the book value
of the shares of stock as shown in the financial statements duly certified by an independent certified
public accountant nearest to the date of sale shall be the fair market value.

Illustrations. —
(i) Assume that Ms. Girl Cantillep sold on October 31, 2008, 100 shares of stock of "A Corporation".
The corporation's accounting period consistently employed in keeping its books of accounts is on a
calendar year basis. In this case, the book value of the shares of stock of "A Corporation" shall be
determined based on its audited financial statements for the calendar year 2007 since its audited financial
statements for the calendar year 2008 is yet nonexistent as of the date of sale.
(ii) Assume that Ms. Mape Sison sold on March 31, 2008, 100 shares of stock of "B Corporation".
The corporation likewise uses calendar year basis accounting period. In this case, the books of accounts
of "B Corporation" have already been closed and adjusted for Calendar Year 2007, but the independent
Certified Public Accountant has yet to issue the audited financial statements for said calendar year 2007
which financial statements together with the annual income tax returns are due to be filed on or before
April 15, 2008.
In this particular case, the book value of the shares of stock of "B Corporation" shall tentatively be
based on the financial statements for Calendar Year 2007 yet to be audited and not on the audited
financial statements of Calendar Year 2006. Once the 2007 audited financial statements have been
issued, adjustment to the book value shall be made for the difference.
(c.2.3) In the case of a unit of participation in any association, recreation or amusement club (such as
golf, polo, or similar clubs), the fair market value thereof shall be its selling price or the bid price nearest to
the date of sale as published in any newspaper or publication of general circulation, whichever is higher.
(c.3) Determination of Gain or Loss from Sale or Disposition of Shares of Stock. — The gain from the
sale or other disposition of shares of stock shall be the excess of the amount realized therefrom over the
basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted
basis for determining loss over the amount realized. The amount realized from the sale or other
disposition of property shall be the sum of money received plus the fair market value of the property
(other than money) received, if any.
(c.3.1) Basis for Determining Gain or Loss from Sale or Disposition of Shares of Stock. — Gain or loss
from the sale, barter or exchange of property, for a valuable consideration, shall be determined by
deducting from the amount of consideration contracted to be paid, the vendor/transferor's basis for the
property sold or disposed plus expenses of sale/disposition, if any.
">(c.3.1.1) Acquired by Purchase. — If the property is acquired by purchase, the basis is the cost of
such property.
"> Determination of the Cost. — The cost basis for determining the capital gains or losses for shares
of stock acquired through purchase shall be governed by the following rules:
">(i) If the shares of stock can be identified, then the cost shall be the actual purchase price plus all
costs of acquisition, such as commissions, documentary stamp taxes, transfer fees, etc.
">(ii) If the shares of stock cannot be properly identified, then the cost to be assigned shall be
computed on the basis of the first-in first-out (FIFO) method.
">(iii) If books of accounts are maintained by the seller where every transaction of a particular stock is
recorded, then the moving average method shall be applied rather than the FIFO method.
">(iv) In general, stock dividend received shall be assigned with a cost basis which shall be determined
by allocating the cost of the original shares of stock to the total number shares held after receipt of stock
dividends (i.e., the original shares plus the shares of stock received as stock dividends).
"> Illustration of cost allocated to stock dividends declared. — Five (5) shares of stock in XYX
Company were acquired at a total cost of Php1,000.00 or at two hundred pesos per share
(Php200/share). XYX Company declared and issued five (5) shares of stock as stock dividend. In this
case, the cost basis for each of the ten (10) shares of stock shall be computed by dividing the cost basis
of the original shares by ten (10) shares, or one thousand pesos (Php1,000.00) divided by ten (10) shares
equals one hundred pesos (Php100.00) per share.
">(c.3.1.2) Acquired by Devise, Bequest or Inheritance. — If the property was acquired by devise,
bequest or inheritance, the basis shall be the fair market value of such property at the time of death of the
decedent.
"> The term "property acquired by bequest, devise or inheritance" as used herein means acquisition
through testamentary or intestate succession and includes, among others:
">(i) Property interests that the taxpayer received as a result of a transfer, or creation of a trust, in
contemplation of or intended to take effect in possession or enjoyment at or after death; and
">(ii) Such property interests as the taxpayer has received as the result of the exercise by a person of
a general power of appointment by will or by deed executed in contemplation of or intended to take effect
in possession or enjoyment at or after death, otherwise known as a donation mortis causa or a donation
in contemplation of death.
">(c.3.1.3) Acquired by Gift. — If the property was acquired by gift, the basis shall be the same as it
would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift,
except that if such basis is greater than the fair market value of the property at the time of the gift, then for
the purpose of determining the loss, the basis shall be such fair market value.
"> Illustration. — Assume that "Mr. Era" bought shares of stock in 1970 at a cost of Php100,000. He
donated these shares to "Mr. Aio" on January 1, 1998, during which time, the said shares has a fair
market value of Php1,000,000 and on the basis of such fair market value, "Mr. Era" paid the
corresponding donor's tax. "Mr. Aio", the donee, sold the shares on January 1, 1999 for a consideration of
PhP2,000,000. In this case, the basis of "Mr. Aio" in computing his gain from the sale shall be at the
historical cost basis thereof in the hands of "Mr. Era", the donor, or at Php100,000. The gain from the sale
in the hands of "Mr. Aio" is Php1,900,000 (i.e., selling price of Php2,000,000 less historical cost thereof in
the hands of "Mr. Era" the donor, at Php100,000 equals gain from the sale made by "Mr. Aio" in the
amount of Php1,900,000).
">(c.3.1.4) Acquired for Inadequate Consideration. — If the property was acquired for less than an
adequate consideration in money or money's worth, the basis of such property is the amount paid by the
transferee for the property.
"> Illustration. — Assume that "Mr. Esq" sold to "Mr. Nma", shares of stock for a consideration of
Php1,000,000. At the time of the sale, its fair market value is Php3,000,000. If "Mr. Nma" later on sells
this property and he is taxable on his gain derived from the sale, his gain from the sale shall be
determined by deducting from the amount of consideration received his purchase price thereof at
Php1,000,000. However, at the time of sale by "Mr. Esq" to "Mr. Nma", the former should pay Capital
Gains Tax and Documentary Stamp Tax on the over-the-counter sale transactions of shares and at the
same time Donor's Tax on the indirect gift which is the difference between fair market value of
shares/stocks sold and the actual consideration for the sold shares of stock.
(c.3.2) Rules on Substituted Basis in cases of Tax-Free Exchanges of Shares of Stock under Section 40
(C) (2) of the Tax Code, as Amended. —
(c.3.2.1) Substituted Basis of Stock or Securities Received by the Transferor. — The substituted
basis of the stock or securities received by the transferor on a tax-free exchange shall be as follows:

(i) The original basis of the property, stock or securities transferred;


(ii) Less: (a) money received, if any, and (b) the fair market value of the other property received, if
any;
(iii) Plus: (a) the amount treated as dividend of the shareholder, if any, and (b) the amount of any gain
that was recognized on the exchange, if any. However, the property received as 'boot' shall have as basis
its fair market value. The term "boot" refers to the money received and other property received in excess
of the stock or securities received by the transferor on a tax-free exchange.
If the transferee of property assumes, as part of the consideration to the transferor, a liability of
the transferor or acquires from the latter property subject to a liability, such assumption or acquisition (in
the amount of the liability) shall, for purposes of computing the substituted basis, be treated as money
received by the transferor on the exchange.
Finally, if the transferor receives several kinds of stock or securities, the Commissioner is
authorized to allocate the basis among the several classes of stocks or securities.
(c.3.2.2) Substituted Basis of the Transferred Property in the Hands of the Transferee. — The
substituted basis of the property transferred in the hands of the transferee shall be as follows:
(i) The original basis in the hands of the transferor;
(ii) Plus: the amount of the gain recognized to the transferor on the transfer.
(c.3.2.3) The Original Basis of Property to be Transferred. — The original basis of the property to
be transferred shall be the following, as may be appropriate:
(i) The cost of the property, if acquired by purchase on or after March 1, 1913;
(ii) The fair market price or value as of the moment of death of the decedent, if acquired by
inheritance;
(iii) The basis in the hands of the donor or the last preceding owner by whom the property was not
acquired by gift, if the property was acquired by donation. If the basis, however, is greater than the fair
market value of the property at the time of donation, then, for purposes of determining loss, the basis shall
be such fair market value; or,
(iv) The amount paid by the transferee for the property, if the property was acquired for less than an
adequate consideration in money or money's worth.
(v) The adjusted basis of (i) to (iv) above, if the acquisition cost of the property is increased by the
amount of improvements that materially add to the value of the property or appreciably prolong its life less
accumulated depreciation.
(vi) The substituted basis, if the property was acquired in a previous tax-free exchange under Section
40 (C) (2) of the Tax Code, as amended.
(c.3.2.4) Basis for Determining Gain or Loss on a Subsequent Sale or Disposition of Property
Subject of the Tax-free Exchange. — The substituted basis as defined in Section 40 (C) (5) of the Tax
Code as amended, and implemented in Section (c.3.2.1) and (c.3.2.2) above, shall be the basis for
determining gain or loss on a subsequent sale or disposition of property subject of the tax-free exchange.
(c.4) Limitation of Capital Losses. — For sale, barter, exchange or other forms of disposition of shares
of stock subject to the 5%/10% capital gains tax on the net capital gain during the taxable year, the capital
losses realized from this type of transaction during the taxable year are deductible only to the extent of
capital gains from the same type of transaction during the same period. If the transferor of the shares is
an individual, the rule on holding period and capital loss carry-over will not apply, notwithstanding the
provisions of Section 39 of the Tax Code as amended.
(c.5) Shares of Stock Becoming Worthless. — Losses from shares of stock, held as capital asset,
which have become worthless during the taxable year shall be treated as capital loss as of the end of the
year. However, this loss is not deductible against the capital gains realized from the sale, barter,
exchange or other forms of disposition of shares of stock during the taxable year, but must be claimed
against other capital gains to the extent provided for under Section 34 of the Tax Code, as amended. For
the 5% and 10% net capital gains tax to apply, there must be an actual disposition of shares of stock held
as capital asset, and the capital gain and capital loss used as the basis in determining net capital gain,
must be derived and incurred respectively, from a sale, barter, exchange or other disposition of shares of
stock.
(c.6) Losses from Wash Sales of Shares of Stock. — The following rules shall apply with respect to
losses from wash sales of shares of stock:
(c.6.1) A taxpayer cannot deduct any loss claimed to have been sustained from the sale or other
disposition of stock, if, within a period beginning thirty (30) days before the date of such sale or disposition
and ending thirty (30) days after such date (referred to in this section as the sixty-one (61)-day period), he
has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was
recognized by law), or has entered into a contract or option so to acquire, substantially identical stock.
However, this prohibition does not apply in the case of a dealer in stock if the sale or other disposition of
stock is made in the ordinary course of the business of such dealer.
(c.6.2) Where more than one loss is claimed to have been sustained within the taxable year from the
sale or other disposition of stock or securities, the provisions of this Section shall be applied to the losses
in the order in which the stock the disposition of which resulted in the respective losses were disposed of
(beginning with the earliest disposition). If the order of disposition of stock disposed of at a loss on the
same day cannot be determined, the stock or securities will be considered to have been disposed of in
the order in which they were originally acquired (beginning with earliest acquisition).
(c.6.3) Where the amount of stock or securities acquired within the sixty-one (61)-day period is less than
the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or
securities the loss from the sale or other disposition of which is not deductible shall be those with which
the stock or securities acquired are matched in accordance with this rule: The stock or securities sold will
be matched in accordance with the order of their acquisition (beginning with the earliest acquisition) with
an equal number of the shares of stock or securities sold or otherwise disposed of.
(c.6.4) Where the amount of stock or securities acquired within the sixty-one day period is not less than
the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or
securities the acquisition of which resulted in the non-deductibility of the loss shall be those with which the
stock or securities disposed of are matched in accordance with this rule: The stock or securities sold or
otherwise disposed of will be matched with an equal number of the shares of stock or securities acquired
in accordance with the order of acquisition (beginning with the earliest acquisition) of the stock or
securities acquired.
(c.6.5) The acquisition of any share of stock or any security which results in the non-deductibility of a
loss under the provisions of this Section shall be disregarded in determining the deductibility of any other
loss.
(c.6.6) As provided in Sec. 2 of these Regulations, the word "acquired" as used in this Section means
acquired by purchase or by an exchange upon which the entire amount of gain or loss was recognized by
law, and comprehends cases where the taxpayer has entered into a contract or option within the sixty-
one-day period to acquire by purchase or by such an exchange the subject shares of stock.
Examples of losses from wash sales of stock or securities. —
(i) On December 1, 2000, Ms. Rose Miranda whose taxable year is the calendar year, purchased
100 shares of common stock of M company for Php10,000. On December 15, 2000, she purchased 100
additional shares for Php9,000. On January 2, 2001, she sold the 100 shares purchased on December 1,
2000 for Php9,000. Because of the provisions of this Section, no loss from the sale is allowable as
deduction.
(ii) Ms. Karren Punzalan, whose taxable year is the calendar year, had the following stock
transactions:
• On September 21, 2000, purchased 100 shares of the common stock of M Company for
Php5,000 or at Php50.00/share.
• On December 21, 2000, she purchased 50 shares of substantially identical stock for Php2,750 or
at Php55/share.
• On December 26, 2000, she purchased 25 additional shares of such stock for Php1,125 or at
Php45/share.
• On January 2, 2001, she sold for Php4,000 the 100 shares purchased on September 21, 2000 or
at Php40.00/share.
Computation of the Indicated Loss
Proceeds from sale of 100 shares Php4,000
Cost of shares bought on September 21, 2000 5,000
–––––––––
Indicated Loss from the sale (Php1,000)
========
Computation of Non-deductible Loss due to the Sixty-one Day Period of Purchase of Substantially
Identical Shares. —
Number of Shares Purchased Within the 61-day
period 75 shares
x Cost/share for shares bought on
September 21, 2000 Php50.00/share
––––––––––––
Amount Php3,750.00
Less: Proceeds from Sale on January 2, 2001
for 75 shares (i.e. 75 x P40/share) 3,000.00
–––––––––
Non-Deductible Loss Php750.00
========
The loss on the sale of the remaining 25 shares (Php1,250 less Php1,000 or Php250) is
deductible subject to the limitations provided in items (c.6.3) above and (c.4) above.
(iii) Ms. Ding Cruz, whose taxable year is the calendar year, had the following stock transactions:
• On September 15, 2000, purchased 100 shares of the stock of M Company for Php5,000.
• On February 1, 2001, she sold these shares for Php4,000.
• On each of the four days from February 15, 2001 to February 18, 2001, she purchased 50 shares
per day of substantially identical stock for Php2,000 per purchase.
There is an indicated loss of P1,000 from the sale of the 100 shares on February 1, 2001, but since within
the sixty-one-day period she purchased not less than 100 shares of substantially identical stock, the loss
is not deductible. The particular shares of stock, the purchase of which resulted in the nondeductibility of
the loss are the first 100 shares purchased within such period, that is, the 50 shares purchased on
February 15, 2001, and the next 50 shares purchased on February 16, 2001.

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

SECTION 9. Taxation of Shares Redeemed for Cancellation or Retirement. — When preferred shares
are redeemed at a time when the issuing corporation is still in its "going-concern" and is not
contemplating in dissolving or liquidating its assets and liabilities, capital gain or capital loss upon
redemption shall be recognized on the basis of the difference between the amount/value received at the
time of redemption and the cost of the preferred shares.
Similarly, the capital gain or loss derived shall be subject to the regular income tax rates imposed under
the Tax Code, as amended, on individual taxpayers or to the corporate income tax rate, in case of
corporations.
This section, however, does not cover situations where a corporation voluntarily buys back its own
shares, in which it becomes treasury shares. In such cases, the stock transaction tax under Sec. 127 (A)
of the Tax Code shall apply if the shares are listed and executed through the trading system and/or
facilities of the Local Stock Exchange. Otherwise, if the shares are not listed and traded through the Local
Stock Exchange, it is subject to the 5% and 10% net capital gains tax.

SECTION 10. Time of Payment of Tax and Manner of Filing Returns. — The tax imposed under Section
5 of these Regulations shall be collected as follows:
(a) Tax on Sale of Shares of Stock Listed and Traded through the Local Stock Exchange. — The
stock broker who effected the sale has the duty to collect the tax from the seller upon issuance of the
confirmation of sale, issue the corresponding official receipt thereof and remit the same to the collecting
bank/officer of the Revenue District Officers (RDO) where the broker is registered within five (5) banking
days from the date of collection thereof and to submit on Mondays of each week to the secretary of the
Local Stock Exchange, of which he is a member, a true and complete return, which shall contain a
declaration, that he made under the penalties of perjury, of all the transactions effected through him
during the preceding week and of taxes collected by him and turned over to the concerned RDO. The
secretary of the Local Stock Exchange shall reconcile the records of the Local Stock Exchange with the
weekly reports of stockbrokers and in turn transmit to the RDO, on or before the 15th day of the following
month, a consolidated return of all transactions effected during the preceding month through the Local
Stock Exchange.
(b) Tax on Shares of Stock Sold or Exchanged through IPO. — The corporate issuer in Primary
Offering shall file the return and pay the corresponding tax to the RDO which has jurisdiction over said
corporate issuer within thirty (30) days from the date of listing of the shares of stock in the Local Stock
Exchange. The return shall be accompanied with a copy of the instrument of sale.
In the case of shares of stock sold or exchanged through Secondary Offering at the time of listing at the
Local Stock Exchange of shares of closely-held corporations, the provisions of subsection (a) of this
Section shall apply as to the time and manner of the payment of the tax on the sale thereof.
(c) Tax on Shares of Stock Not Traded through the Local Stock Exchange. — Persons deriving
capital gains from the sale or exchange of listed shares of stock not traded through the Local Stock
Exchange as prescribed by these regulations shall file a return within thirty (30) days after each
transaction and a final consolidated return of all transactions during the taxable year on or before the
fifteenth (15th) day of the fourth (4th) month following the close of the taxable year.
In the case of an individual taxpayer, the filing of the final consolidated return of all transactions shall be
during the calendar year. However, for corporate taxpayers, the filing of the final consolidated return of all
transactions shall be in accordance with the accounting period employed by such taxpayer which may
either be calendar or fiscal year basis.

SECTION 11. Effect of Non-Payment of Tax. — No sale, exchange, transfer or similar transaction
intended to convey ownership of, or title to any share of stock shall be registered in the books of the
corporation unless the receipts of payment of the tax herein imposed is filed with and recorded by the
stock transfer agent or secretary of the corporation. It shall be the duty of the aforesaid persons to inform
the Bureau of Internal Revenue in case of non-payment of tax. Any stock transfer agent or secretary of
the corporation or the stockbroker, who caused the registration of transfer of ownership or title on any
share of stock in violation of the aforementioned requirements shall be punished in accordance with the
provisions of Title X, Chapters I and II of the Tax Code, as amended.

SECTION 12. Penalties. — In addition to the civil and criminal liabilities of the taxpayer, for violation of
the provisions of these Regulations, the following administrative penalties prescribed under Secs. 248
and 249 of the same Tax Code shall be imposed, which shall be collected at the same time, in the same
manner and as part of the tax.
(a) Surcharges. —
(a.1) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-
five percent (25%) of the amount due, in the following cases:
(a.1.1) Failure to file any return and pay the tax due thereon as required by the provisions of the Tax
Code, as amended, and these Regulations, on the date prescribed;
(a.1.2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer
other than those with whom the return is required to be filed; or
(a.1.3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of
assessment; or
(a.1.4) Failure to pay the full or part of the amount of the tax shown on any return required to be filed
under the provisions of the Tax Code, as amended, and these Regulations, on or before the date
prescribed for its payment.
(a.2) In case of willful neglect to file the return within the period prescribed by the Tax Code or these
Regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be
fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of
such return before the discovery of the falsity or fraud.
(b) Interest. — There shall be assessed and collected on any unpaid amount of tax, interest at the
rate of twenty percent (20%) per annum.
(c) Deficiency Interest. — Any deficiency in the tax due shall be subjected to interest at the rate of
twenty percent (20%), which interest shall be assessed and collected from the date prescribed for its
payment until the full payment thereof.
(d) Delinquency Interest. — In case of failure to pay the amount of the tax due on the return required
to be filed, or a deficiency tax, or any surcharge or interest thereon on the due date appearing in the
notice and demand of the Commissioner of Internal Revenue, there shall be assessed and collected on
the unpaid amount, interest at the rate of twenty percent (20%) per annum until the amount is fully paid,
which interest shall form part of the tax.

SECTION 13. Repealing Clause. — All regulations, rules, orders or portions thereof which are
inconsistent with the provisions of these Regulations are hereby amended, modified or repealed.

SECTION 14. Effectivity Clause. — These Regulations shall take effect fifteen (15) days after its
publication in any newspaper of general circulation in the Philippines.

(SGD.) MARGARITO B. TEVES


Secretary of Finance

Recommending Approval:
(SGD.) LILIAN B. HEFTI
Commissioner of Internal Revenue

June 20, 1990


REVENUE MEMORANDUM ORDER NO. 31-90

Subject : Prescribing the Use of the Revised BIR Form No. 1951, (Revenue Officer's Field Report).

To : All Revenue Officers and Others Concerned.

I. Objectives:

This Order is issued to:

1. Ensure that all claims for reimbursement of traveling expenses of Revenue Officers are supported
with the prescribed report.

2. Facilitate the processing of vouchers and preclude questions on the action taken in post audit.

II. Guidelines:

1. All Revenue Officers doing field work as examiners, seizure agents and inspectors are now
required to use the Revised BIR Form No. 1951, Revenue Officer's Field Report, in preparing their
monthly report which serves as attachment to the Traveling Expense Voucher (TEV). cd

2. As previously required in RMO No. 51-68 dated October 30, 1968, the Revenue Officer's Field
Report should be properly accomplished, signed by the claimant and duly approved by the Chief of
Division/Office.

III. Effectivity:

This Order takes effect immediately.

(SGD.) JOSE U. ONG


Commissioner of Internal Revenue