BIR Ruling [DA-013-05]

January 19, 2005 BIR RULING [DA-013-05] 22 (B); DA-523-2004 10/08/04 Nest Builders & Development Corp . #8 Dinar St. Jem 9 Subdivision Tandang Sora, Quezon City Attention: Mr. Nestor S. Leal President/CEO Gentlemen : This refers to your letter dated November 22, 2004 requesting a confirmation of your opinion that the Joint-Venture Agreement you entered into with Mr. Ernesto O. Sea, over the development of the condominium project (Northridge Mansion) is exempt from the payment of capital gains tax and documentary stamp tax. It is represented that NEST BUILDERS & DEVELOPMENT CORP. (NEST Builders for short) is a domestic corporation with business address at #8 Dinar St. Jem 9 Subd., Tandang Sora, Quezon City; that on July 17, 2002, it entered into a Joint-Venture Agreement (JVA) with Mr. Ernesto O. Sea for the development of a parcel of land located at and described as No. 60 Road 13, Pag-asa, Quezon City, Metro Manila, consisting of 611 sq.m. more or less, covered by TCT #N-257105 of the Register of Deeds for Quezon City; that the Joint-Venture will be for the purpose of the development of the Northridge Mansion Condominium; that it is the agreement of both parties that Mr. Sea will contribute the said land, and Nest Builders will infuse technical and development works; that, also, an amended agreement was made last January 30, 2004 authorizing NEST Builders as the duly authorized agent/representative to do and perform all and every act necessary to effect and carry out the desired objectives of the JVA; that further, as could be read from the most recent Amended JVA dated September 27, 2004, it was agreed that the Condominium Certificates of Titles shall be applied, registered and issued in the name of NEST Builders as the builder and developer of the condominium project and as a trustee for Mr. Sea's shares with the end in view of expediting and facilitating the sale and disposition of each condominium unit to prospective buyers either on cash basis or thru bank financing scheme, copy of the Amendment to the Joint Venture Agreement dated September 27, 2004 is attached hereto as Annex "A"; that your agreement had been annotated at the back of the mother title of the projects, copy of the mother title with the said annotation is attached hereto as Annex "B"; that you are now in the process of segregating the titles; that, after the completion of the condominium project, you are now ready to transfer the title of the common areas to the condominium corporation (Northridge Mansion Condominium). Based on the foregoing representations, you now request confirmation of your opinion that: 1. The Joint-Venture dated July 17, 2002, between Mr. Ernesto O. Sea and NEST Builders for the development of the Northridge Mansion Condominium is not subject to any tax imposed under the Tax Code of 1997 except the Documentary Stamp Tax (DST) under Section 188 of the same Code; CaSHAc 2. That likewise, the transfer of the title of the common areas to the Condominium Corporation is not subject to internal revenue taxes except DST under Section 188 of the Tax Code of 1997; 3. That the Agreement whereby it was stipulated that all the CCTs be issued in the name of NEST Builders as contained in your Amendment to JVA dated September 27, 2004 for the purpose of expediting sale of the units is not a taxable event; In reply, please be informed as follows: Pursuant to Section 22 (B) of the Tax Code of 1997, the term corporation includes partnership, 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, coals, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. P.D. No. 929 amended the definition of the taxable corporation as not to include joint venture formed for the purpose of undertaking construction projects. The reasons for such amendment are: (1) Local contractors contribute substantially to the development program of the country; (2) Local contractors are at a disadvantage in competitive bidding with foreign contractors in view of limited capital and financial resources; (3) In order to be able to compete with big foreign contractors, it may be necessary for them to enter into joint ventures to pool their limited resources in undertaking big construction projects; (4) To assist them in achieving competitiveness with foreign contractors, the joint ventures formed by them should not be considered an additional income tax lien. Considering that it is the intention of the legislature to exclude joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, this Office is of the opinion as it hereby holds that the joint venture entered into by and between Mr. Ernesto O. Sea and NEST Builders is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. HDAaIc The allocation of saleable units of the project between Mr. E. O. Sea and NEST Builders, in consideration of their respective contributions, as stipulated in this Agreement is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT imposed in Section 106 to 108 of the same Tax Code. Hence, by contributing its parcel of land, Mr. Ernesto O. Sea, neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) The Project Partition whereby Mr. Ernesto O. Sea and NEST Builders will allocate unto each other their share in the net saleable area in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgment to said Project Partition is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. It is understood however, that upon subsequent disposition by the co-venturers of the areas allocated to them, the gain that may be realized by them from such sale will be subject to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, 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. DISaEA Likewise, the transfer of the title to the common areas to the Condominium Project (Northridge Mansion) is not subject to any internal revenue taxes except for DST pursuant to Section 188 of the 1997 Tax Code since there was neither a contract of sale over a realty as the transfer of the same is made without monetary consideration. However, the notarial acknowledgment on the deed of conveyance will be subject to the DST on certification pursuant to Section 188 of the Tax Code of 1997. (DA-234-96) Finally, your agreement that all the titles be issued in the name of NEST Builders per your Amendment to Joint Venture Agreement dated September 27, 2004 (Annex "A" hereof) and as annotated at the back of the mother title (Annex "B" thereof) for the purpose of expediting the sale thereof is not a taxable event. The transfer is made without any monetary consideration, thus no income tax will be payable and collective thereon. Furthermore, Section 185 of the Revised Documentary Stamp Tax Regulation (Reg. #26) provides that conveyances of realty not in connection with the sale to trustees of the other persons without consideration are not taxable. 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 will be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group