How to Legally Not Pay VAT for the Ordinary Asset of a Corporation?

By Realttorney®

Most seasoned CRBs know the difference between an ordinary asset and a capital asset classification of real properties owned by different persons. And, most all know the types of internal revenue taxes that are due on the sale of the different asset classes.

As a review, the sale, barter or exchange of a real estate classified as a capital asset necessitates the payment of capital gains tax (CGT) and documentary stamp tax (DST) only. Meanwhile, if the parcel of land is defined as an ordinary asset of the registered owner then payment of creditable withholding tax (CWT), DST and value-added tax (VAT) is in order.

The biggest percentage of all three taxes is the 12% VAT. And, often, it is the deal breaker in a transaction with both seller and buyer refusing to shoulder the hefty amount of VAT. But, there is a way to avoid paying VAT for a real property defined as an ordinary asset of the registered owner. But, this can only be done if the registered owner is a single-asset corporation.

A common estate planning tool in the 1990s, real properties registered in the name of Family Holding Corporations are typically considered ordinary assets by the Bureau of Internal Revenue (BIR). But, if the deal can be structured where the buyer will purchase the shares of the single-asset family corporation then the payment of VAT can be dispensed with altogether.

Under BIR Revenue Regulation No. 6-2013, the value of the shares of stock at the time of sale shall be the fair market value (FMV) using the Adjusted Net Asset Method. Almost always, using the ANA method of RR No. 6-2013 increases the FMV of the share of stock of the corporation because the BIR would always look for the latest Appraisal Report to determine the current value of the real property and use this value in the computation of the BOOK VALUE of the shares of stock. In its simplest equation, book value is computed as such: total assets minus total liabilities plus retained earnings over the total outstanding number of shares. The value in the appraisal Report is inputted in the asset category.

However, BIR Revenue Regulation No. 20-2020, dated 3 August 2020 changed the rules again to determine the FMV of shares of stocks of corporations not listed and traded in the local stock exchange. Upon the effectivity of the latest Revenue Regulation, the following rule shall apply: “For common shares of stock, the BOOK VALUE based on the latest available financial statements duly certified by an independent public accountant prior to the date of sale, but not earlier than the immediately preceding taxable year, shall be considered as the prima facie fair market value.” What is the effect of this latest regulation?

Since BIR will no longer require the latest Appraisal Report then the FMV of the shares of stock of a single-asset corporation will definitely be lower versus the previous rule using the ANA Method. Finally, please remember that RA 10963 (TRAIN Law) increased the 5%-10% tax rates to a single 15% single tax rate on net capital gains realized by a person or domestic corporation from the sale, barter, exchange, or other disposition of shares of stock in a domestic corporation not traded in the local stock exchange.

Now, the manner and propriety of using a Family Holding Corporation as a wealth-preservation tool in the current regulatory environment is a totally different matter. But, it is observed that setting up a Family Holding Corporation is still somewhat popular among estate planners in today’s setting, “despite its dubious ability to actually save on taxes and transfer fees,” as Atty. Edson T. Eufemio said in his 2004 article in the Philippine Law Journal.


Atty. Jojo is a real estate attorney, an estate planning attorney, a licensed real estate broker, and a PRC-accredited Lecturer/ Speaker for Training Programs in Real Estate. He is a Chartered Trust and Estate Planning (CTEP®) professional who is committed to educating Filipinos about the value and importance of having an estate plan in their lives.

Published by Atty. Jojo

A loving husband and devoted father; a gentleman farmer; a licensed real estate broker; a real estate & estate planning attorney; and a practicing Catholic.

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