Tuesday, September 23, 2008 Tax notes: Tax-free exchange of properties
NO gain or loss shall be recognized on the transfer of real property, fixed assets, inventory, and excess creditable withholding tax in exchange for shares of stocks of the transferee corporation if, as a result of the transfer, the transferor gains control of the transferee corporation.
The transfer of real property is not subject to value-added tax (VAT) inasmuch as the property is not held by the transferor primarily for sale or for lease.
Transfer of fixed assets, inventory, and excess creditable withholding tax are likewise not subject to VAT for the following reasons:
1. The transfer is not done in the regular course of business. Likewise, it cannot be construed as a transaction incidental to the regular conduct of business because the transfer is an incident of a corporate reorganization.
2. The transfer will not result in a real sale, barter or exchange because there will be no real change in ownership of the properties.
3. The transfer is not within the context of a “deemed sale” transaction. The business of the transferor company will not be retired. (Bureau of Internal Revenue Ruling DA(S40M-005) 027-2008, July 10, 2008)
The transfer of properties for shares of stocks under a tax-free exchange pursuant to Section 40(C)(2) of the Tax Code of 1997 is specifically exempt from documentary stamp tax.
However, taxpayers are required to secure a ruling from the BIR) in order to confirm that the said transfer is a tax-free exchange of properties. (Source: Punongbayan & Araullo)
