Transferring Company Real Property to an Incorporator

I. Introduction

In Philippine corporate practice, it is not uncommon for a corporation to transfer ownership of its real property (land, buildings, or condominium units) to one of its incorporators. This may arise in various contexts: liquidation of the incorporator’s equity, retirement or separation arrangement, settlement of unpaid subscriptions in kind (though rare after incorporation), compensation or bonus package, property dividend distribution, or simple sale.

While the transaction appears straightforward, it is laden with corporate law, tax, property law, and constitutional restrictions that, if not carefully navigated, can render the transfer void, trigger substantial tax liabilities, expose directors to personal liability, or even invite criminal prosecution for fraudulent conveyance.

This article exhaustively discusses every legal facet of such a transfer under the Revised Corporation Code (RCC, Republic Act No. 11232), the National Internal Revenue Code (as amended by TRAIN, CREATE, and subsequent revenue regulations), the Property Registration Decree, and related laws as of December 2025.

II. Corporate Authority to Dispose of Real Property

Under Section 39 of the Revised Corporation Code, a corporation may, by majority vote of its board of directors, sell, lease, exchange, mortgage, pledge, or otherwise dispose of any or all of its property and assets upon such terms and conditions as the board may deem expedient.

Key points:

• Stockholders’ approval is no longer required even if the property constitutes all or substantially all of the corporation’s assets (this is the major change introduced by the RCC in 2019; the old Corporation Code required 2/3 stockholder approval).
• However, if the disposition renders the corporation incapable of continuing the business or accomplishing the purpose for which it was incorporated, dissenting stockholders are entitled to exercise appraisal right under Section 81(b) of the RCC.
• The board may, in its discretion, abandon the transaction even after stockholder ratification (if any was sought) without further approval, subject only to third-party rights.

III. Special Rules When the Transferee is an Incorporator Who is Also a Director, Trustee, or Officer

Most incorporators eventually become directors or officers. When the transferee is an “interested” party, Section 31 of the RCC applies. The contract is voidable at the corporation’s option unless ALL the following conditions are present:

1. The interested director did not participate in the quorum;
2. His vote was not necessary for approval;
3. The contract is fair and reasonable under the circumstances;
4. For corporations vested with public interest, the material contract must be approved by 2/3 of the entire board with a majority of independent directors voting in favor; and
5. If the transferee is merely an officer (not director), the contract must have been previously authorized by the board.

If any of the first three conditions is absent, the contract may still be ratified by stockholders representing at least 2/3 of the outstanding capital stock in a meeting called for the purpose, provided full disclosure of the adverse interest is made and the contract is fair and reasonable.

Failure to comply renders the transfer voidable, and the interested director/officer may be held solidarily liable for damages.

IV. Constitutional and Statutory Restrictions on Land Ownership

The 1987 Constitution (Art. XII, Secs. 2, 3, 7, and 8) strictly limits private land ownership to Filipino citizens and corporations at least 60% Filipino-owned.

Consequences for the transfer:

• If the incorporator is a foreign national or a Philippine corporation with more than 40% foreign equity, the transfer of land (or shares that would result in foreign control of land-owning corporation) is void ab initio (Chong v. Dela Cruz, G.R. No. 213276, July 26, 2023, reiterating Muller v. Muller and Republic v. Register of Deeds).
• Condominium units are exempt up to 40% total foreign ownership in the project (R.A. 4726).
• Buildings/improvements may be transferred separately from the land via a long-term lease arrangement, but the land itself cannot be titled in the foreigner’s name.
• Former natural-born Filipinos may acquire up to 5,000 sq.m. urban or 3 hectares rural land under B.P. 185 and R.A. 8179.

Any attempt to circumvent the restriction through nominee arrangements or trusts is void and may constitute criminal violation of the Anti-Dummy Law.

V. Modes of Transfer and Their Legal Characterization

The legal and tax treatment varies radically depending on how the parties characterize the transfer:

1. Deed of Absolute Sale
   Most common and cleanest mode. Requires payment of adequate consideration (preferably at or near zonal value to avoid donor’s tax reclassification).

2. Property Dividend (Distribution in Kind)
   Governed by Sections 43 and 71–73 of the NIRC. The corporation is deemed to realize gain as if it sold the property at fair market value (FMV). The stockholder-recipient recognizes dividend income equal to the FMV.

3. Redemption of Shares Using Corporate Real Property
   If the transfer is in exchange for the incorporator’s shares (share buy-back), the transaction may be treated as:

   • Capital transaction (return of capital + capital gain) if it completely terminates the stockholder’s interest or is “not essentially equivalent to a dividend” (BIR Ruling DA-073-2007); or
   • Taxable dividend to the extent of earnings and profits (most common outcome in closely held corporations).

4. Dation in Payment (Dación en Pago) for Unpaid Subscription or Loan
   Rare post-incorporation, but possible if the incorporator has an outstanding subscription balance or loan to the corporation.

5. Donation
   Almost never used because the corporation would pay 6% donor’s tax on the FMV with no business purpose, and directors may be liable for misuse of corporate funds.

6. Compensation or Bonus to Officer/Director
   Possible but must be reasonable (Section 29, NIRC). Excessive compensation is treated as dividend or gift.

VI. Tax Implications (As of December 2025)

A. Taxes Payable by the Corporation (Transferor)

1. Capital Gains Tax (CGT) – 6% final tax based on the higher of gross selling price or BIR zonal value/FMV (Section 24(D), NIRC). Applies even on property dividends or redemption (corporation is deemed to sell at FMV).
2. Creditable Withholding Tax – None on sale of real property by corporation (only on sale by individuals/estates/trusts).
3. Value-Added Tax – Exempt if the corporation is not engaged in real estate business and the property is a capital asset. If the corporation is a real estate dealer or the property is an ordinary asset, 12% VAT applies.
4. Documentary Stamp Tax (DST) – P15.00 for every P1,000 (1.5%) of the higher of consideration or FMV (Section 196, NIRC; RR 18-2021).
5. Corporate Income Tax on Gain – If the property is an ordinary asset, the gain (FMV/SP minus cost) is subject to 25% RCIT (20% if domestic corporation with net taxable income ≤ P5M and total assets ≤ P100M under CREATE).

B. Taxes Payable by the Incorporator (Transferee)

1. If sale at FMV – No income tax on the purchase itself; only CGT when he later sells.
2. If property dividend or redemption treated as dividend – Ordinary income tax (0%–35%) or 10% final withholding tax on dividends for resident individuals (Section 24(B)(2), NIRC).
3. If inadequate consideration – The difference between FMV and actual consideration is treated as donation subject to 6% donor’s tax paid by the donor (corporation), but BIR increasingly requires the transferee to pay if reclassified.
4. Documentary Stamp Tax – Same as above (shared or shouldered by buyer per practice).
5. Local Transfer Tax – 0.5%–0.75% of FMV, payable to the city/municipality where the property is located.
6. Registration Fees with Register of Deeds – Based on FMV.

C. BIR Clearance Requirements

• CARL (Comprehensive Agrarian Reform Law) coverage requires DAR clearance or exemption.
• BIR must issue Certificate Authorizing Registration (CAR) upon payment of CGT/DST and submission of required documents (BIR Form 2306 for DST, 1706 for CGT).

VII. Procedural Steps for Valid Transfer of Title

1. Board resolution approving the transfer (and stockholder ratification if self-dealing or appraisal right concerns).
2. Execution of notarized Deed of Absolute Sale/Dation/Distribution.
3. Payment of donor’s tax (if applicable) and securing BIR Form 2322.
4. Payment of CGT and securing CAR (BIR Form 1906 or electronic CAR).
5. Payment of local transfer tax and securing Certificate of No Improvement or Tax Clearance from Assessor.
6. Payment of DST and affixing DST stickers or e-DST.
7. Submission to Register of Deeds: Deed, CAR, tax receipts, owner’s duplicate TCT/CCT, Real Property Tax Clearance, and Condominium Certificate of Title if applicable.
8. Issuance of new TCT/CCT in the name of the incorporator.

VIII. Common Pitfalls and How to Avoid Them

• Transferring land to a foreigner or foreign-controlled corporation → transaction void ab initio.
• Selling below zonal value → BIR reclassification as partial donation + donor’s tax + penalties.
• Failure to secure stockholder ratification in self-dealing transaction → transfer voidable + directors’ personal liability.
• Disposing of substantially all assets without considering appraisal rights → dissenting stockholders can demand fair value payment.
• Using corporate property as “retirement gift” without board approval or reasonable compensation characterization → ultra vires + possible estafa or qualified theft charges against directors.

IX. Conclusion

Transferring corporate real property to an incorporator is legally permissible but requires meticulous compliance with the Revised Corporation Code, constitutional land ownership restrictions, and multiple layers of taxation. The safest and most common route is an arm’s-length sale at fair market value approved by a disinterested board majority, with all taxes paid and clearances secured. Any attempt to disguise a distribution, gift, or retirement benefit as a “sale” will almost certainly be pierced by the BIR, resulting in substantial deficiency taxes, surcharges, and interest.

Corporate secretaries and counsel are well-advised to document the business purpose, obtain an independent appraisal, and secure advance BIR ruling when the transaction is substantial or involves related parties.