Adelina Realty Corporation

January 11, 2007 BIR RULING [DA-015-07] 22 (B); DA-491-2005 Adelina Realty Corporation 7/F La Paz Center, 211 Salcedo St., Legaspi Village, 1229 Makati City Attention: Mr. Augusto L. Campos, Jr. Gentlemen : This refers to your letter dated March 20, 2006, stating that a joint venture agreement was entered into by and between Adelina Realty Corporation, a corporation duly organized and existing under and by virtue of Philippine laws, referred to as developer that will develop parcels of land into a prime residential subdivision within a period of twelve (12) months from the time of conversion of the area into a residential class, and South Lake Realty & Development Corporation, a corporation duly organized and existing under and by virtue of Philippine laws with office address at No. 11 South Zuzuaregui Street, Old Balara, Diliman, Quezon City, referred to as landowner that will turn over peaceful possession of parcels of land and deliver the titles to the developer; that the purpose of the Joint Venture Agreement is to develop certain parcels of land into a prime residential subdivision with the facilities and amenities for sale to the general public known as the ADELINA HOMES-LIPA EXTENSION; that the area subject of Joint Venture Agreement is Twenty Five Thousand Nine Hundred Forty Nine (25,949) square meters, more or less, to be developed as residential saleable lots and jointly marketed, inclusive of open spaces and roads; and that the parties agree that ownership of the saleable lots shall be 60% for Adelina Realty Corporation and 40% for South Lake Realty & Development Corporation. In connection therewith you now request for a legal opinion on the tax consequences of the following: 1. What would be the taxes involved when South Lake Realty Development Corporation transfer to Adelina Realty Corporation, its 60% share of the total saleable lots for its development of the project? 2. What would be the taxes involved when South Lake Realty Development Corporation transfers to Adelina Realty Corporation the 35% corresponding to the open spaces and lots, which pursuant to the paragraph 6.1 of the Joint Venture Agreement "shall be registered and turned over to the developer upon the completion of the project"? 3. Would there be capital gains taxes, documentary stamp taxes and VAT (and if there is any, how much) when the parties eventually execute a Deed of Assignment for the resultant lots in the project? 4. What would be the taxes involved when Adelina Realty Corporation eventually sells its share of saleable lots to third parties? In reply, please be informed that pursuant to Section 22 (B) of the Tax Code of 1997, as amended, the term "corporation" includes 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. TcIaHC P.D. No. 929 amended the definition of the taxable corporation so 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 as additional income tax lien. Considering therefore, 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 hereby opines that the joint venture by and between the Owner and the Developer is not subject to income tax under Section 27 of the Tax Code of 1997, as amended. The assignment by the Owner to the Developer of its corresponding share of the net proceeds of sale of lots in the aforesaid project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the aforestated assignment is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The Memorandum of Sharing whereby the Owner and the Developer will allocate unto each other their shares in the total saleable lots/net proceeds of the sale, in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation 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 Memorandum of Sharing is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, as amended, 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 Sections 106 to 108 of the same Tax Code. Hence, by contributing its parcel of land, the Owner, neither sells, barters, exchanges goods, properties nor render services to be subject to VAT. (BIR Ruling No. DA-491-2005 dated December 6, 2005) IcEaST It is understood however, that upon the 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 or capital gains tax under Section 27 (D) (5), as the case may be. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, based on the gross selling price or fair market value of the property, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. aEcTDI This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be ascertained that the facts are different, then this ruling shall be considered as null and void. DaAISH Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service