Crown Communities

January 10, 2008 BIR RULING [DA-007-08] 22 (B); DA-018-2006 Crown Communities Suite No. 101, Dacay Building No. 72 Escario Street, Capitol Site Cebu City Attention: Atty. Cecilia A. Ramilo Tax Department Head Gentlemen : This refers to your letter dated September 5, 2007 requesting for confirmation of your opinion that: 1. The Land Development Agreement (LDA) executed by and between Cebu Realty Incorporated, represented by its President, Erwin L. Chiongbian and Priscilla Chiongbian, in her capacity as separate landowner, hereafter jointly referred to as the "LANDOWNERS" and Crown Communities (Cebu), Incorporated as the "DEVELOPER", for the development of several parcels of land into an improved residential subdivision with allocation for commercial area, 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 LANDOWNERS 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; cIECTH 3. The Deed of Partition whereby the LANDOWNERS 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 LANDOWNERS 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 January 16, 2007, an LDA was executed by and between Cebu Realty Incorporated represented by its President, Erwin L. Chiongbian and Priscilla Chiongbian, in her individual capacity as separate landowner, hereafter jointly referred as "LANDOWNERS" and Crown Communities (Cebu), Incorporated represented by its Chief Operating Officer Michael Regino and its General Manager Bernadette Malbas, hereafter referred to as "DEVELOPER". Pursuant with the LDA, the parties agreed that the LANDOWNERS shall contribute several parcels of land (subject properties) to the Joint Venture project, and the DEVELOPER shall undertake to develop subject properties into an improved residential subdivision with allocation for commercial area. In reply, please be informed as follows: TICDSc 1. The LDA executed between the LANDOWNERS and DEVELOPER described above is an agreement between the parties for the development of the subject properties into a residential subdivision and commercial project 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) 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 a 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 LANDOWNERS and DEVELOPER in accordance with their respective equity contributions as stipulated in the Deed of Partition 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. HEAcDC It is to be understood, however, that upon subsequent disposition by the parties under the LDA 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, 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, as amended by RR No. 4-2007. (BIR Ruling No. DA-262-2001 dated December 18, 2001) 3. The Deed of Partition whereby the LANDOWNERS 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 Deed of Partition was executed without consideration and was not in connection with a sale between the LANDOWNERS and DEVELOPER, no DST is due and collectible on said Deed of Partition. However, we understand that the notarial acknowledgments to said Deed of Partition 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