1) Why this topic matters

In Philippine tax practice, the seller’s VAT registration status does not automatically mean that every sale is subject to VAT. For real property, the key question is almost always:

Is the real property being sold a “capital asset” or an “ordinary asset” for the seller?

That classification drives whether the transaction is subject to 6% capital gains tax (CGT) or 12% VAT (plus regular income tax)—and it also dictates the withholding tax, invoicing, and the process for securing the BIR’s certificate authorizing registration (CAR/eCAR).

2) Core legal framework (conceptual map)

Philippine taxation of real property dispositions generally divides into two regimes:

A. Capital asset regime (CGT)

For certain sellers and assets, the National Internal Revenue Code (NIRC) imposes a final tax on presumed gain:

6% CGT on the sale/exchange/other disposition of real property located in the Philippines classified as a capital asset (for individuals and for domestic/resident foreign corporations, subject to the statutory conditions).

Key characteristics:

Final tax (generally not part of regular income tax computation for the transaction).
Tax base is the higher of (i) gross selling price/consideration or (ii) fair market value (FMV) (as determined under the NIRC rules).
Typically not subject to VAT.

B. Ordinary asset regime (VAT + regular income tax)

If the real property is an ordinary asset (i.e., held primarily for sale, inventory, or used in business), the sale is generally:

Subject to 12% VAT (if not exempt and seller is VAT-registered or the transaction is VATable), and
Subject to regular income tax on actual gain (net of cost/basis), and
Commonly subject to creditable withholding tax (CWT) on the purchase price, depending on the parties and classification.

3) The decisive concept: “Capital asset” vs “Ordinary asset”

A. General definitions (practical understanding)

For Philippine income tax purposes:

Capital assets are generally all property not considered ordinary assets.

Ordinary assets commonly include:

Stock in trade / inventory or property held primarily for sale to customers in the ordinary course of business (e.g., a real estate developer’s subdivision lots).
Property used in business that is subject to depreciation (e.g., a building used as the company’s office and carried as property, plant and equipment).
Real property used in trade or business (even if not subject to depreciation in the same way as equipment), depending on how used and classified under tax rules and regulations.
Property of a kind that would properly be included in inventory if on hand at year-end.

B. Why VAT registration does not control classification

A VAT-registered entity can sell:

an ordinary asset (VAT likely applies), or
a capital asset (CGT likely applies, VAT typically does not).

VAT is a tax on sale in the course of trade or business (and certain deemed sales). A sale of a capital asset is commonly treated as outside that VAT concept because it is not a sale of inventory nor a sale of property used/held for business in the way VAT contemplates.

C. How classification is determined (what examiners look at)

In practice, classification is heavily fact-based. Expect scrutiny on:

1) Nature of the seller’s business

Real estate dealers, developers, and lessors face a higher risk that property is treated as ordinary.

2) Purpose of acquisition and holding

Was it acquired for resale? for leasing? for use as headquarters? for investment?

3) Actual use

Was it used in operations (office, warehouse, plant)?
Was it leased out as part of business?

4) Accounting/tax treatment

Classified as inventory vs investment property vs PPE.
Depreciation claimed (strong indicator of business use).
Reported under VAT returns as capital goods (context matters).

5) Pattern and frequency of sales

Repeated sales resembling a real estate business invite ordinary-asset treatment.

Practical warning: Merely booking a property as “Investment Property” does not automatically make it a capital asset for tax. Substance and use prevail.

4) CGT treatment (capital asset sales)

A. When CGT applies

CGT generally applies when:

The property is real property located in the Philippines; and
It is classified as a capital asset in the hands of the seller; and
The seller falls within the statutory coverage for the 6% CGT regime.

This includes sale, exchange, and other dispositions (not just a “Deed of Absolute Sale”), which can capture:

dacion en pago (property given in payment),
certain transfers in satisfaction of debt,
some foreclosure contexts (depending on structure and characterization),
other conveyances treated as disposition.

B. CGT rate and tax base

Rate: 6%

Base: Higher of

Gross selling price (or total consideration), or
Fair market value (FMV).

FMV determination (common rule of thumb in transfers):

FMV is often measured using the higher of:
- BIR zonal value, or
- assessed value per latest tax declaration (or other FMV basis recognized for transfer purposes), depending on the applicable rule and documentation at transfer.

Because the base is “higher of” values, selling below FMV does not reduce CGT.

C. Filing and payment (transactional compliance)

For capital asset transfers, the seller typically files a CGT return and pays CGT within a short statutory period (commonly within 30 days from the date of sale/transfer, depending on the form and rules). Payment and documentary requirements are crucial because the BIR will not issue the CAR/eCAR without them.

D. Effect on income tax

CGT is typically a final tax for the transaction. The gain is not taxed again under regular income tax, though reporting may still be required depending on the taxpayer’s return mechanics and BIR requirements.

5) VAT treatment (and why it usually does not apply to capital assets)

A. When VAT applies to real property sales

A sale of real property is generally VATable if it is:

a sale in the course of trade or business, and
not covered by a VAT exemption, and
the seller is VAT-registered (or required to be registered), and
the transaction falls within VAT rules on real property sales (including the specialized rules on “sale of real properties” and thresholds/exemptions for certain residential sales).

B. The key takeaway for this topic

If the property is truly a capital asset of the VAT-registered entity, the sale is typically treated as:

Subject to 6% CGT, and
Not subject to VAT (because the sale is not in the course of trade or business as VAT uses that concept for selling assets).

C. Common trap: “Used in business” property is rarely a capital asset

Many corporate real properties are ordinary assets because they are used in business (office, plant, warehouse) or held for lease as part of business. If so, the sale is typically:

subject to VAT (if VATable and not exempt), and
subject to regular income tax, not CGT.

So, the phrase “capital asset by a VAT-registered entity” is often where disputes arise: the BIR may argue it was actually used in business, hence ordinary.

6) Comparing the two regimes (what changes in real life)

A. Tax types and rates

If CAPITAL ASSET (CGT regime):

6% CGT on higher of selling price or FMV
No VAT (in general for true capital asset disposition)
DST applies (documentary stamp tax)
Local transfer taxes/fees apply

If ORDINARY ASSET (VAT regime):

12% VAT on gross selling price (if VATable and not exempt)
Regular income tax on net taxable gain
DST applies
Likely CWT applies on the purchase price (buyer-withholding), depending on rules and parties
Local transfer taxes/fees apply

B. Withholding tax differences (often deal-critical)

CGT transactions: generally not subject to CWT on the purchase price the same way ordinary-asset sales are; the focal tax is the final CGT.
Ordinary-asset transactions: buyers are often required to withhold CWT (rates vary based on taxpayer classification and other factors under withholding regulations).

This affects cash flow and closing mechanics.

C. Invoicing differences for VAT-registered sellers

A VAT-registered seller should still issue proper invoices/receipts. For a capital asset sale treated as not subject to VAT, the invoice should reflect the correct characterization (commonly shown as “VAT-exempt” or “not subject to VAT” depending on the exact basis and documentation practice), and should not separately bill output VAT.

Incorrect invoicing (e.g., charging VAT when not due, or failing to follow VAT invoice requirements) can trigger administrative exposure.

7) Documentary Stamp Tax (DST) and other transfer taxes (apply in both regimes)

Regardless of CGT vs VAT, real property transfers commonly trigger:

A. Documentary Stamp Tax (DST)

DST applies to the document of conveyance (e.g., deed of sale, deed of assignment). The tax base is commonly tied to the higher of consideration or FMV used for transfer tax purposes. The DST rate for conveyances of real property is set by the NIRC.

DST must be paid within the required statutory deadline (often tied to the month of notarization/execution under DST rules).

B. Local taxes and fees

Expect:

Local transfer tax (provincial/city/municipal, rate varies by locality)
Registration fees (Registry of Deeds)
Notarial fees
Possible real property tax (RPT) clearance requirements
Condominium-specific requirements (if a condo unit is sold)

These are deal-closing items independent of whether the national tax is CGT or VAT.

8) Compliance workflow (closing checklist logic)

A typical closing sequence (simplified):

Confirm classification (capital vs ordinary) using facts and documentation.
Compute the correct national taxes:
- If capital: CGT (6%) + DST
- If ordinary: VAT + income tax implications + DST + applicable withholding
Prepare required BIR forms and attachments.
Pay taxes within statutory deadlines.
Secure CAR/eCAR from the BIR.
Pay local transfer tax and registration fees.
Register the deed with the Registry of Deeds and update tax declarations.

Misclassification at Step 1 can derail the CAR/eCAR issuance.

9) High-risk issues and frequent disputes

A. “One-time sale” vs “in the course of business”

A seller may view the sale as a one-off liquidation of an investment, but the BIR may argue it is part of business if:

the seller’s line of business involves real estate,
the property was leased out systematically,
the property was used in operations,
multiple sales are occurring.

B. Properties used in business operations

If the entity used the property as:

office,
factory,
warehouse,
staff housing tied to operations,
leased asset integral to the business,

then ordinary-asset/VAT treatment becomes more likely, even if the seller calls it “investment.”

C. Input VAT and capital goods history

Where the property’s acquisition or improvements involved VAT and input VAT claims, the BIR may probe whether the asset was truly outside the VATable business sphere. The factual record (leases, expense allocations, VAT returns, depreciation schedules) can become evidence.

D. Selling price below FMV

For CGT and often for transfer-tax related computations, “higher of selling price or FMV” eliminates underpricing benefits and raises:

deficiency tax risk,
penalties and interest,
potential allegations of simulated consideration in extreme cases.

10) Practical guidance for VAT-registered entities selling a “capital asset”

To defensibly apply CGT and not VAT, the seller should be able to show a coherent story supported by documents:

1) Board resolutions / investment intent

Why the property was held as investment, not for sale.

2) Proof of non-use in business

No depreciation claimed (or strong explanation if any).
Not used as office/warehouse/production site.
If leased, explain whether leasing is the seller’s business and how it is treated.

3) Accounting and tax consistency

Financial statements classification aligns with actual use.
Prior returns and schedules do not contradict the position.

4) Clean computation support

Zonal value/assessed value documents
Tax declarations, titles, deeds, and proof of consideration
Proof of DST and CGT payment

11) Summary: the governing rule

For a VAT-registered entity selling real property in the Philippines:

If the property is a capital asset: the transaction generally falls under the 6% CGT regime and is generally not subject to VAT.
If the property is an ordinary asset (held for sale, used in business, or otherwise within the course of trade or business): the sale is generally under the VAT + regular income tax regime (subject to exemptions and special rules), and often triggers CWT obligations for the buyer.

The classification is the linchpin—VAT registration alone does not decide the tax.