Lim and Ocampo Law Offices

January 19, 2007 BIR RULING [DA-032-07] Section 22 (B); DA-277-2003 Lim and Ocampo Law Offices 4th Floor, ACT Tower 135 Sen. Gil J. Puyat Avenue Salcedo Village, Makati City Attention: Atty. Jeffrey L. Ocampo Gentlemen : This refers to your letter dated January 8, 2007 requesting confirmation of your opinion on the tax consequences of the Joint Venture Agreement (JVA) entered by and between Sta. Lucia Realty & Development Inc. ("SLRDI") and Surfield Development Corporation ("SDC"). As represented, SLRDI, a corporation engaged in the business of real estate development, entered into a JVA dated March 21, 2005 with SDC for the development of the latter's property located in the City of Mandaluyong, into residential subdivision to be known as "Acropolis Mandaluyong" ("the Project"). The salient provisions of the JVA are as follows: 1) SDC shall contribute three (3) parcels of land with an aggregate area of Forty Seven Thousand Seven Hundred Eighty (47,780) square meters ("the Property") covered by Transfer Certificates of Title Nos. 9608, 9609, and 9610 of the Registry of Deeds of Rizal and SLRDI shall furnish at its own expense all materials, equipment, labor and services for the development of the Property into a residential subdivision and the construction of the necessary structures thereon all in accordance with the Development Plans approved by SDC, the HLURB and such other government agencies. 2) SDC shall share the net sales proceeds of the resultant saleable lots of the Project with SLRDI such that SLRDI shall receive an amount equivalent to 27.5% of the net sales proceeds of the saleable area of the Project while SDC shall get seventy two and one-half percent (72.5%) of the net sales proceeds of all saleable lots (the "Agreed Sharing"). All saleable lots of the Project shall belong and be registered under the name SDC. The JVA shall be annotated on the titles of the Property. It was also agreed by SDC and SLRDI that Orchard Property Marketing Corporation ("OPMC") shall be exclusive marketing agent of the Project. 3) SDC and SLRDI agreed that the saleable lots comprising ten percent (10%) of the total saleable lots of the Project shall be reserved for SDC and SLRDI in proportion for the Agreed Sharing (the "Reserved Lots"). The Reserved Lots shall not form part of the inventory to be sold by OPMC but shall not be sold by SDC and SLRDI in competition with those being sold by OPMC. The proceeds for the sale of the Reserved Lots shall belong to the party to whom they are assigned. DHSCTI 4) In the event that there are lots which remains unsold after three (3) years from the opening sale of the lots in the Project, SDC and SLRDI agreed to divide and allocate such unsold lots among themselves in accordance with their Agreed Sharing and the detailed procedures set forth in the JVA. SDC and SLRDI shall execute the necessary documents to enable SDC to transfer ownership of the unsold lots allocated to SLRDI. In view of the foregoing, you now request confirmation of the following: 1) The joint venture entered into by and between SDC and SLRDI for the purpose of undertaking the Project is not a taxable corporation pursuant to Section 22 of Republic Act No. 8424 (The Tax Reform Act of 1997); hence, is not subject to the regular income tax. 2) The gain that may be realized by SDC and SLRDI from the receipt of their respective shares in the actual net sales proceeds of the saleable lots from the joint venture bank account is subject to the regular corporate income tax, credible withholding tax and the value-added tax (VAT). 3) The allocation of the Reserved Lots between SDC and SLRDI is not a taxable event and is not subject to income tax or any withholding tax because the allocation does not involve any monetary consideration and is a mere return of capital contribution. The transfer is also not subject to VAT since the transfer is not in the ordinary course of business but simply a return of capital contribution. 4) The partition of the lots which remain unsold after three (3) years from the opening sale of the saleable lots in the Project between SDC and SLRDI is not subject to documentary stamp tax, income tax and any withholding tax because the partition is made without any monetary consideration is a mere return of capital contribution. In reply, please be informed as follows: 1) Pursuant to Section 22(B) of the Tax Code of 1997, 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. Considering the foregoing, the joint venture of SDC and SLRDI for the construction and development of the Project will not create a taxable joint venture within the meaning of Section 22 (B), in relation to Section 27 (A) of the Tax Code of 1997. Accordingly, the joint venture formed as a result of the Agreement by and between SDC and SLRDI for the construction and development of a residential subdivision is not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. 2) It is only upon sale or disposition of the lots allocated the SDC and SLRDI to third parties that gain realized by the parties in the said transaction will be subject to the regular 35% (now 33%) income tax under Section 27 (A) of the Tax Code of 1997, the creditable withholding tax under Revenue Regulations (Rev. Regs.) No. 2-98 as amended by Rev. Regs. No. 6-2001 and the VAT under Section 106 of the Tax Code of 1997. The transfer of the said properties to the third parties shall likewise be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the consideration or the fair market value of the property being transferred, whichever is higher. 3) The allocation of the reserved lots between SDC and SLRDI of their specific share in the Project in consideration of their contribution in the Project, as stipulated in the JVA, and the issuance of the corresponding Certificates of Title by the Registry of Deeds of Mandaluyong to SDC and SLRDI representing their respective shares or participating interests in the Project as stipulated in the JVA is not a taxable event because the allocation is a mere return of capital that each contributed. The same is, therefore, not subject to income, withholding, value-added and documentary stamp taxes. However, the acknowledgment to the Deed is subject to documentary stamp tax under Section 188 of the Tax Code of 1997. 4) Section 185 of the Revised Documentary Stamp Tax (DST) 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 Deed of Conveyance and Partition Agreement involving the lots which remain unsold after three (3) years from the opening sale of the saleable lots are without consideration and are not in connection with a sale, no income will be generated and a fortiori, no income creditable withholding, value-added and documentary taxes are payable and collectible. However, the acknowledgment to the Deed of Conveyance and Subdivision Agreement are subject to DST of P15.00 pursuant to Section 188 of the Tax Code of 1997. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service