In a Philippine property sale, disputes often arise about who bears the responsibility for registration expenses, eviction of occupants, and capital gains taxes. In Vive Eagle Land, Inc. v. Court of Appeals, the Supreme Court clarified these obligations, ruling that while the vendor generally shoulders registration expenses, capital gains tax liabilities depend on the specific laws in effect at the time of the sale and the nature of the seller. This decision highlights the importance of clearly defined contractual agreements and understanding tax implications in real estate transactions, providing clarity to buyers and sellers in similar situations.

Unpacking Real Estate Deals: Who is Stuck Paying the Capital Gains Tax and Removing Squatters?

This case revolves around a series of property sales initiated by the Spouses Raul and Rosalie Flores. They initially agreed to sell land to Tatic Square International Corporation (TATIC), who then obtained a loan from Capital Rural Bank of Makati, Inc. (Bank) to finance the purchase. As part of the agreement, the Spouses Flores warranted that the property titles were free of any claims. TATIC then sold the land to Vive Eagle Land, Inc. (VELI). Later, VELI sold a portion of the land to Genuino Ice Co., Inc. (Genuino). Genuino then filed a complaint against VELI, alleging failure to transfer the title, evict squatters, and pay capital gains tax.

The Regional Trial Court (RTC) ruled in favor of Genuino, ordering VELI to transfer the title, pay the capital gains tax, and remove the squatters. The Court of Appeals (CA) affirmed the RTC’s decision with modifications, specifically holding VELI liable for registration expenses. VELI then appealed to the Supreme Court, questioning their obligations regarding registration expenses, capital gains tax, and eviction of squatters. The central legal question was whether VELI was obligated to bear these costs despite previous agreements involving the original owners and TATIC.

The Supreme Court examined the three separate deeds of sale: between the Spouses Flores and TATIC, TATIC and VELI, and finally, VELI and Genuino. The court acknowledged that the initial agreement between the Spouses Flores, TATIC, and the Bank placed the responsibility for registration and capital gains tax on the Spouses Flores and their broker. Additionally, TATIC agreed to evict the tenants. However, VELI’s sale to Genuino presented a new scenario. Article 1487 of the New Civil Code states that the vendor bears the expenses for registration of sale unless there is a stipulation to the contrary.

In this case, the deed between VELI and Genuino did not explicitly address registration expenses. Therefore, the Supreme Court ruled that, based on Article 1487, VELI, as the vendor, was responsible for the registration expenses related to the sale to Genuino. Furthermore, based on Article 1495 the vendor is bound to transfer ownership and deliver the property to the vendee. Although the addendum between VELI and Genuino allowed the latter to withhold P300,000 until the property was cleared of squatters, this did not relieve VELI of its obligation to ensure the eviction of the occupants.

Regarding the capital gains tax, the Supreme Court reversed the CA’s ruling. The Court clarified that at the time of the sale between VELI and Genuino (1988), the 1977 National Internal Revenue Code (NIRC) was in effect. Crucially, under Sections 21(e) and 34(h) of the 1977 NIRC, capital gains tax applied to individual taxpayers, not corporations. Because VELI was a corporation at the time of the sale, it was not liable for capital gains tax on that specific transaction. The relevant provision is quoted below:

(h) The provision of paragraph (b) of this Section to the contrary notwithstanding, net capital gains from the sale or other disposition of real property by citizens of the Philippines or resident alien individuals shall be subject to the final income tax rates prescribed as follows:…

This is an important distinction. VELI was not exempt from all taxes related to the sale; instead, gains from the sale should have been treated as ordinary income and included in their corporate income tax return, subject to the prevailing corporate tax rate. The Court clarified that Section 24(D) of the 1997 NIRC, which does impose capital gains tax on corporations, could not be applied retroactively to the 1988 transaction.

The court emphasized that subsequent laws cannot be retroactively applied unless explicitly stated, reaffirming the principle that contracts are governed by the laws existing at the time of their execution. The Court stated:

It is settled that only laws existing at the time of the execution of a contract are applicable thereto and not later statutes, unless the latter are specifically intended to have retroactive effect.

The Supreme Court’s decision offers some important guidelines and clarification. It affirms that registration expenses fall on the vendor unless otherwise agreed, vendors are obligated to ensure eviction of occupants, and corporations weren’t subjected to capital gains tax under the 1977 NIRC.

FAQs

What was the key issue in this case?	The key issue was determining who was responsible for the registration expenses, capital gains tax, and eviction of squatters following the sale of property from VELI to Genuino. The outcome hinged on the applicable laws and agreements at the time of the sale.
Who generally pays for the registration of a property sale?	Unless there’s a specific agreement stating otherwise, the vendor (seller) is typically responsible for the expenses related to the registration of the sale. This is according to Article 1487 of the New Civil Code.
Was VELI required to evict the squatters from the land?	Yes, VELI was obligated to ensure the eviction of the squatters. This was indicated in the addendum of the deed, which mentioned the withholding of P300,000 until the squatter removal was complete.
Why wasn’t VELI required to pay capital gains tax?	Because VELI was a corporation, not an individual, and the sale occurred in 1988 when the 1977 NIRC, which did not impose capital gains tax on corporations, was in effect. Corporations had their gains taxed as ordinary income.
What happens if there is no agreement between the parties regarding registration of the property?	According to Article 1487, the expenses of registration will be shouldered by the vendor. The article states: “The expenses for the execution and registration of the sale shall be borne by the vendor, unless there is a stipulation to the contrary.”
If the transfer has squatters and no agreement has been entered between the parties, what happens?	Vendors remain obligated to evict squatters as the seller is duty-bound to deliver ownership and possession of property to the buyer
Was this decision applicable in this day and age?	No, if a transaction occurs at the present, capital gains taxes now apply to corporations. The law may be different at the time.
What code is applicable when filing taxes for individuals in relation to sales of land and real property?	Section 24(D) of the 1997 NIRC is currently the basis for imposing capital gains taxes to private individuals.

The Supreme Court’s ruling underscores the need for clear and comprehensive agreements in property sales, especially regarding expenses and tax liabilities. Understanding the tax laws applicable at the time of the transaction is equally critical. This case serves as a reminder for parties to seek legal counsel to ensure their agreements align with current legislation and to protect their interests in real estate transactions.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Vive Eagle Land, Inc. v. Court of Appeals, G.R. No. 150308, November 26, 2004