Communities Batangas, Inc.

January 10, 2008 BIR RULING [DA-006-08] 22 (B); DA-018-2006 Communities Batangas, Inc. 2nd Floor, MVL Centre, Brgy. Paninsingin Tambo, Lipa City Attention: Ms. Loida D. Nacario Chief Accountant Gentlemen : This refers to your letter dated March 13, 2007 requesting for confirmation of your opinion that: 1. The Land Development Agreement (LDA) executed by and between Household Development Corporation as the "LANDOWNER" and Crown Communities (Batangas), Incorporated as the "DEVELOPER", for the development of four (4) parcels of land into a mixed-use residential subdivision, will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A), both of the National Internal Revenue Code (NIRC), as amended; 2. The allocation of saleable lots between the LANDOWNER and DEVELOPER in consideration of their respective contributions, as stipulated in the LDA, is not a taxable event and is not subject to income tax, and subsequently withholding tax, and the Value-Added Tax (VAT), since the allocation of saleable lots is in fact a mere return of capital that each has contributed; cSEDTC 3. The sharing and partition contained in the LDA, whereby the LANDOWNER and DEVELOPER allocated unto each other their share in the saleable lots in consideration of their respective contributions, is not subject to the Documentary Stamp Tax (DST) imposed under Section 196 of the NIRC, as amended, nor to any income tax, and consequently withholding tax, since the allocation is made without monetary consideration and is not in connection with a sale. Rather, the partition is made merely to segregate the saleable lots between the parties, as the return of the capital which each contributed. However, it is understood that should the LANDOWNER and/or DEVELOPER sell any of the saleable lots allocated to them, to third parties, the gain that may be realized from said sale will be subject to regular (corporate) income tax, in accordance with Section 27 of the NIRC, as amended by Republic Act No. 9337 and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as last amended by RR No. 30-2003. Based on the representations, as well as from the documents submitted, the facts are as follows: On December 11, 2006, an LDA was executed by and between Household Development Corporation represented by its President, Maribeth Tolentino and Chief Finance Officer Estrellita S. Tan, hereafter referred to as "LANDOWNER" and Crown Communities (Batangas), Incorporated represented by its President Jerylle Luz C. Quismundo and its Accountant Loida D. Nacario, hereafter referred to as "DEVELOPER". Pursuant thereto, the parties agreed that the LANDOWNER shall contribute four (4) parcels of land with an aggregate area of 39,645 square meters, covered by TCT Nos. T-96638, O-1338, T-3313 and T-1317 to a Joint Venture project and the DEVELOPER shall undertake to develop the subject properties into a mix-use residential subdivision. In reply, please be informed as follows: 1. The LDA executed between the LANDOWNER and DEVELOPER described above is an agreement between the parties for the subdivision and development of the aforementioned parcels of land into a mixed-use residential subdivision which is neither a contract of sale over real property nor an instrument which conveys title to real property. Hence, no income tax or documentary stamp tax (DST) is due upon the execution of the LDA (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the LDA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code, as amended. (BIR Ruling No. DA-303-2005 dated July 5, 2005) aHTCIc Section 22 (B) of the 1997 Tax Code, as amended, 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 partnerships" 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 LDA executed between the parties does not give rise to a taxable joint venture. The parties to the joint venture agreement may file separate income tax returns for their net revenue for 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 LANDOWNER and DEVELOPER in accordance with their respective equity contributions as stipulated in the LDA 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. It is to be understood, however, that upon subsequent disposition by the parties under the LDA of their respective shares, 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, as amended by R.A. No. 9337, capital gains tax imposed under Section 24 (D) of the same Code, and to the creditable withholding tax under Revenue Regulations (RR) 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, as amended, 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, as implemented by RR No. 16-2005. (BIR Ruling No. DA-262-2001 dated December 18, 2001) ECISAD 3. The sharing and partition embodied in the LDA whereby the LANDOWNER and DEVELOPER have allocated unto each other their share in the saleable lots in consideration of their respective contributions, are 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 are not taxable." Accordingly, since the aforementioned sharing and partition was executed without consideration and was not in connection with a sale between the LANDOWNER and DEVELOPER, no DST is due and collectible on said LDA. However, we understand that the notarial acknowledgments to said LDA shall be subject to the DST pursuant to Section 188 of the NIRC, as amended, in the amount of P15.00. 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