Both parties, sellers and buyer, had their respective reasons for needing to conclude the sale in the shortest possible timeframe. In addition, neither of the parties had too much leeway on the transaction costs – the buyer had a narrow budget for the purchase while at the same time the sellers were under pressure to attain a certain minimum amount as their net proceeds. The challenge was thus to minimize transaction costs and to execute the transaction in the shortest time possible.
The property was a home that was owned by a real estate development corporation, albeit never used in the company’s operations nor ever intended to be held for lease or for sale to customers. A sale of the property would have subjected the transaction to the customary taxes imposed on a sale of property by a real estate developer, namely, a 12% Value-Added Tax (VAT), a 1.5% documentary stamp tax and, at yearend, a 25% corporate income tax. Moreover, the eventual distribution to the shareholders would be subjected to a 10% tax on the cash dividends. Thus, while a sale could have been executed very quickly, it would have been a very costly transaction for both parties and would not allow the sellers to attain their desired minimum net proceeds.
An alternative option that was also explored was to spin off the property to a shelf company via a tax-free exchange and subsequently sell the shares of the shelf company. This option was undoubtedly very tax-efficient, yielding overall tax savings of 65% for the sellers and 71% for the buyer if compared with a sale of the property. However, the time it would have taken to activate the shelf company, transfer the property to the shelf company in exchange for shares, and registering the title in the name of the shelf company would have taken several months, time which neither of the parties had.
Finally, TFA proposed a scarcely used mode of conveyance – property dividends. It is a type of dividend amply supported by the Corporation Code and the Tax Code, and the parties and their financial and legal advisers agreed that it was the best option that addressed not just the parties’ need to keep transaction costs to the barest minimum but also their need to execute the sale quickly.
Because it is not a commonplace transaction, no revenue regulation or memorandum circular had ever been written to address the minutiae involved in property dividends. In the face of this vacuum in the regulations, TFA employed its interpretation of the intent of the law to vigorously advocate for the correct tax basis to be upheld by the regulators.
In sum, by taking TFA’s advice, the parties attained the highest possible tax savings and executed the sale relatively quickly under the circumstances.