LST Development Corporation

January 9, 2008 BIR RULING [DA-004-08] 22 (B); DA-122-2007 LST Development Corporation KLG Building, Delbros Avenue cor. Venecia de Leon St. Barrio Ibayo, Paraaque City Attention: Atty. Lanee Cui-David Counsel Gentlemen : This refers to your letter dated December 17, 2007 requesting for confirmation of your opinion that the Joint Venture Agreement executed between LST Development Corporation ("Developer") and Agrarian Reform Beneficiaries Association ("Landowner"), is not subject to income, creditable withholding, documentary stamp and value-added taxes. HDCAaS Background LST Development Corporation ("LST" for brevity) is a corporation duly organized and existing under the laws of the Republic of the Philippines, engaged in the business of acquiring, developing and selling real estate, including residential subdivisions. 2008tax On the other hand, the members of Agrarian Reform Beneficiaries Association ("ARBA") are the absolute and registered owners in fee simple of several parcels of land hereinafter referred to as the PROJECT, covered by Transfer Certificate of Title (TCT) No. CLOA-1424, which was later segregated into 53 individual titles, namely Transfer Certificates of Title (TCT) Nos. 1156043, 1156044, 1156045, 1156046, 1156047, 1156048, 1156049, 1156050, 1156051, 1156052, 1156053, 1156054, 1156055, 1156056, 1156057, 1156058, 1156059, 1156060, 1156061, 1156062, 1156063, 1156064, 1156065, 1156066, 1156067, 1156068, 1156069, 1156070, 1156071, 1156072, 1156073, 1156074, 1156075, 1156076, 1156077, 1156078, 1156079, 1156080, all of the Registry of Deeds of Cavite. Said real properties, with a total area of ONE MILLION (1,000,000) square meters. HIaTCc On September 27, 2006, LST, as the developer, entered into a Joint Venture Agreement (JVA) with ARBA members for the development of the subject properties located at General Trias, Cavite, into a big commercial farming and/or large agricultural production, and alternatively, for commercial, industrial and/or residential purposes. The salient portions of the Joint Venture Agreement are as follows: 1. LST shall undertake a full blast commercial farming/agricultural production, and/or the subdivision and horizontal development of the subject properties, a residential project, which development shall include improvements and facilities as agreed upon; 2. LST shall shoulder all the equipment, engineering, materials and labor expenses, incurred relative to the agricultural production/subdivision and horizontal development of the project; 3. For and in consideration of the agricultural production/subdivision and development obligations and undertakings it will assume, LST shall receive seventy percent (70%) of the saleable lots/agricultural products in the project which shall result from said subdivision and horizontal development. The remaining thirty percent (30%) shall be retained in ownership by the ARBA members, ETCcSa ARBA members and LST agree to register or transfer the individual titles of the property (or any portion thereof) under the name of LST. In reply, please be informed, as follows: 1. The JVA executed between the Developer and Landowner as described above is an agreement between the parties for the subdivision and horizontal development of fifty-three (53) parcels of land into a big commercial farming and/or large agricultural production, and alternatively, for commercial, industrial and/or residential development purposes which are neither contracts of sale over real property nor instruments which convey title to real property. Hence, no income tax or documentary stamp tax (DST) is due upon the execution of the JVA (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the JVA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code. (BIR Ruling No. DA-303-2005 dated July 5, 2005) SAHIaD Section 22 (B) of the 1997 Tax Code, provides: "(B) The term corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts ( cuentas en participacion ), associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. "General professional partnership" are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." From the foregoing definition of a corporation, we confirm your opinion that the JVA executed between the parties do not give rise to a taxable joint venture. The parties to a joint venture agreement may file separate income tax returns for their net revenue from the above-mentioned project less their respective proportionate share in the joint venture expenses since the joint venture is not embraced within the meaning of the term "corporation", hence, not subject to the corporate income tax imposed under Section 27 (A) of the 1997 Tax Code. (BIR Ruling No. 002-97 dated January 14, 1997) 2. The allocation and distribution of the saleable lots to the Developer and Landowner in accordance with their respective equity contributions as stipulated in the JVA is not subject to income tax, withholding tax or capital gains tax, since the allocation/distribution is without consideration, not in connection with a sale and constitutes mere return of capital. Likewise, the said allocation and distribution is not subject to DST for want of consideration. HIDCTA It is to be understood, however, that upon subsequent disposition by the parties under the JVA of the individual/subdivided lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rate provided under Section 27 (A) of the 1997 Tax Code, capital gains tax imposed under Section 24 (D) of the same Code, and to the creditable withholding tax under Revenue Regulations No. 2-98, as last amended by RR No. 30-2003. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code based on the gross selling price or fair market value of the properties whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. (BIR Ruling No. DA-262-2001 dated December 18, 2001) 3. The agreement whereby all saleable lots shall be titled and registered under the name of the Developer, instead of executing a partition agreement and registering the same under the name of the Developer or Landowner is not subject to the DST imposed under Section 196 of the NIRC, as amended, considering that the allocation is made without monetary consideration and is not in connection with a sale. In this regard, Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26)provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration were not taxable." Accordingly, since the Agreement is executed without consideration and is not in connection with a sale between the Developer and Landowner, no DST is due and collectible on said Agreement. However, the notarial acknowledgments on said Agreements shall be subject to the DST pursuant to Section 188 of the NIRC, as amended, in the amount of P15.00. aEcHCD This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service