Transferring Land to Your Corporation Tax-Free: Step-by-Step Process

If Person A owns a land worth ₱10M and wishes to transfer this land to a holding company (owned 99% by A and B) under the tax-free exchange provisions of RMC 19-2022, here is a step-by-step guide to facilitate this process.

1. Preliminary Steps: Understand the Requirements

Ensure that the transfer qualifies as a Tax-Free Exchange (TFE) under Section 40(C)(2) of the Tax Code, which covers transfers to a controlled corporation. The key condition is that Person A (the transferor) must collectively control at least 51% of the corporation after the transfer, which is satisfied since A and B collectively own 99%.

No Prior BIR Ruling Required: The transfer does not need a BIR confirmatory ruling, but posttransaction compliance is mandatory.

2. Prepare the Deed of Exchange

Draft a Deed of Exchange, clearly detailing the following:

Description of the land (including location and size).
Valuation of the land (₱10 million).
Shares to be issued by the holding company to Person A in exchange for the land.

This document formalizes the tax-free transfer and will be necessary for the Certificate Authorizing Registration (CAR) application.

3. Annotate the Transfer Certificate of Title (TCT)

Annotate the land’s Transfer Certificate of Title (TCT) to reflect the exchange. The annotation must include:

The Deed of Exchange
The original cost or historical acquisition cost of the land.
The fact that the exchange was tax-free, with no gain or loss recognized.

Submit Documentation to the Revenue District Office (RDO) Submit the following documents to the RDO where the land is located:

Deed of Exchange.
Annotated Transfer Certificate of Title (TCT) reflecting the transaction.
Application for Certificate Authorizing Registration (CAR) – This is the critical step that authorizes the legal registration of the exchange.
BIR Form No. 1927 (Application and Joint Certification for tax-free exchange under Section 40(C)(2)).
Certified copies of all documents (TCT, Deed of Exchange, etc.).

The RDO will process the CAR, ensuring compliance with RMC 19-2022.

5. Issuance of CAR

Once the RDO processes the submitted documents, they will issue a Certificate Authorizing Registration (CAR). This certifies the tax-free status of the transfer and enables legal registration.

The CAR must specify that the transaction is a tax-free exchange under Section 40(C)(2).
Include details of the substituted basis (original cost of the land).

6. File Annual Income Tax Return

Both Person A (transferor) and the holding company (transferee) must incorporate the transaction details in their annual tax returns:

A complete statement outlining the non-recognition of gain or loss.
Details about the transferred land and its value.

7. Annotate Financial Statements

The holding company must disclose the exchange in its Audited Financial Statements (AFS). Include a note in the AFS stating:

The land was acquired in a tax-free exchange.
The year the exchange occurred.

This is a critical step to ensure proper tracking for future sales or dispositions of the land.

8. Post-Transaction Audit Compliance

The BIR may conduct a post-transaction audit to confirm that the transaction complies with tax-free exchange rules. The audit will involve checking:

The annotated TCT.
Proper filing of the substituted basis.

Ensure all documentation is readily available for audit:

The CAR, annotated TCT, and financial statement notes will be critical for the BIR review.

9. Track and Record the Substituted Basis

For future tax purposes, the substituted basis (original cost of the land) must be properly tracked. This substituted basis will be used for calculating any gain or loss when the land is eventually sold or disposed of by the holding company.

Ensure that the holding company’s accounting books properly reflect the substituted basis for accurate reporting during subsequent transactions.

10. Finalize Accounting Entries

Ensure both Person A and the holding company comply with mandatory accounting entries as outlined in RMO 17-2016:

The holding company must record the acquisition of land in exchange for shares.
Person A must record the receipt of shares.

Both must ensure these are reflected in the year-end financial statements and internal records.

Conclusion

Following these steps ensures that the tax-free transfer of the land from Person A to the holding company complies with the requirements of RMC 19-2022 and avoids unnecessary tax exposure. Always maintain documentation for future audits and reference.

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Babylon2k helps your businesses adapt, making them compliant to handle the complications of tax filing, audit, financial statements, and accounting entries. Utilizing our expertise in accounting and tax ensures that your business remains compliant while minimizing disruptions to your operations.

Whether you’re a small business, or a growing startup, Babylon2k provides tailored solutions to meet your business’s need, designed to simplify processes for you. Each service has a corresponding code (e.g., 110010, 110040), and the following services under tax, accounting, and audit are:

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