BIR Ruling [DA-045-02]

March 13, 2002 BIR RULING [DA-045-02] Integral Realty Corporation Cortijos Greenhills Condominium 25 Eisenhower Street San Juan, Metro Manila Attention: Mr. Rolando V. Tongco President Gentlemen : This refers to your letter dated August 22, 2000 requesting for a ruling on the tax implication of the Joint Venture Agreement entered into by Integral Realty Corporation and Ms. Virginia O. Morales for the construction and development of a condominium project. It is represented that Ms. Virginia O. Morales is the absolute and registered owner of a parcel of land located at Wilson Street, San Juan, Metro Manila covered by TCT No. 30991(625-R) containing an area of 1,475 square meters; that Integral Realty Corporation is an established developer/builder of several townhouses and condominium projects and has offered to construct on the former's lot a residential condominium for sale to the public; that on June 14, 1995, a Memorandum of Agreement was entered into by Ms. Virginia O. Morales and Integral Realty Corporation for the latter to develop a condominium project known as One Wilson Place; that once completed, Ms. Virginia O. Morales shall receive approximately 1835 sq. m. of the condominium saleable area inclusive of the parking spaces which later was revised to 1756.09 of unit area and 20 parking slots of 12.50 each as agreed in the Additional Supplement to Memorandum of Agreement dated August 14, 1996; that the units allocated to Ms. Virginia O. Morales are as follows: Unit No. Unit Area (sq. m.) GF-A 132.66 2D 102.06 3C 151.53 4E 102.06 5A 106.38 9A 106.38 9B 75.44 9G 75.96 9H 149.72 10C 151.53 12F 151.53 16B 75.44 18F 149.72 18G 75.96 18H 149.72 that the 20 (twenty) parking slots allocated for the above units are: G09, G10, 121, 122, 125, 126, 225, 226, 229, 230, 325, 326, 329, 330, 425, 426, 430, 442, 443; that the broker, Margarita R. Guingon was allocated Unit 4C (formerly 403) and parking slot No. 331; that on September 1, 1995, Ms. Virginia O. Morales executed a Deed of Absolute Sale transferring the title of her lot to Integral Realty Corporation as agreed upon in the Memorandum of Agreement dated June 14, 1995; and that with the transfer of title to Integral Realty Corporation the condominium certificates of title of all units in One Wilson Place Condominium Project shall be initially released under the name of Integral Realty Corporation which will then transfer the titles of the allocated units to Ms. Virginia O. Morales and Ms. Margarita R. Guingon. In connection therewith, you now request for a ruling as to whether or not the transfer of the Condominium Certificates of Title of the allocated 15 condominium units and 20 parking slots from Integral Realty Corporation to Ms. Virginia O. Morales and that of Unit 4C and parking slot No. 331 to Ms. Margarita R. Guingon, respectively, are exempt from capital gains tax/creditable withholding tax, VAT and the corresponding documentary stamp tax. In reply thereto, please be informed that the contributions of Integral Realty Corporation and Ms. Virginia O. Morales to the joint venture for the construction and development of the condominium is not a taxable event that will give rise to the payment of capital gains tax and creditable withholding tax, since contribution of land to the joint venture project is but a capital contribution to the said joint venture project, and therefore, no taxable event has taken place. The same is true in the case of VAT since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchange, leases goods or properties, readers services and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 107 of the Tax Code of 1997. By contributing land to the joint venture project, Ms. Virginia O. Morales neither sells, barters, exchanges goods or property nor renders services nor imports goods to be subject to VAT. Hence, the capital contribution of land to the joint venture project by Ms. Virginia O. Morales is not subject to capital gains tax, creditable withholding tax and VAT. ( BIR Ruling No. DA 165-99 dated March 18, 1999 ) Moreover, the allocation and distribution of her shares in the project consisting of condominium units, parking slots in consideration of her contributions, as stipulated in the Memorandum of Agreement is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that she has contributed. ( BIR Ruling Nos. 10-96 dated January 23, 1996; DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998 ) The eventual transfer of titles in her name is but a mere formality, hence, not a taxable event. The taxable event, like creditable withholding tax, income tax and value-added tax, will arise when she starts selling her shares to third parties. However, the transfer of the Condominium Certificate of Title allocated as Unit 4C (formerly 403) and parking slot No. 331 to Ms. Margarita R. Guingon as broker's commission shall be subject to the 5% creditable withholding tax imposed under Section 2.57.2(G) of Revenue Regulations No. 2-98, as amended and to the corresponding documentary stamp tax prescribed in Section 196 of the Tax Code of 1997 both based on the consideration or fair market value in accordance with Section 6(E) of the said Code, whichever is higher. 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.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service