BIR Ruling [DA-056-06]

March 23, 2006 BIR RULING [DA-056-06] DA-656-2004; Sec. 22 (B) E.L. Punsalan and Associates G-104 Medical Plaza Makati Amorsolo cor. Dela Rosa Street Makati Attention: Atty. Eranio L. Punsalan Gentlemen : This refers to your letter dated February 1, 2006, requesting this Office to modify BIR Ruling No. DA-656-2004, which you erroneously cited as DA-192-2001, as regards your clients' joint venture agreement with Landco Pacific Corporation (Landco). The modification is requested with a view towards substituting the Landowners' individual personalities in the said agreement for four (4) corporations the Landowners have established to represent them in this venture. However, you pray that the said ruling stands the same in all other respects, especially as regards the taxable aspects of said venture. The Antecedent Facts : It is represented that E.L. Punsalan and Associates ' (" E.L. Punsalan " for brevity) clients namely: Dionisio Falgui III, Ma. Diana P. Falgui, Richard Dio Falgui, Jojo F. Alonzo, Gil Jay Palacio, Mary Grace Palacio, Ronald Daniel Palacio, Geminiano P. Noche, Emily P. Noche, Rafael C. Palacio Jr. and Jasmin C. Palacio (hereinafter collectively referred to as the " Landowners ") entered into a joint venture agreement with Landco on November 12, 2004 to develop the former's land equivalent to NINE HUNDRED TWENTY-TWO THOUSAND SEVEN HUNDRED EIGHTY-FIVE (922,785) SQUARE METERS and turn the same into a first class community. This agreement, however, did not result in the transfer to the joint venture of the Landowners' properties as the titles to the same remain in their hands and were only contributed for development. Under Paragraph 13.0 of the above joint venture agreement, the Landowners reserved the option to establish a corporation through which they shall execute all acts they are mandated to perform under the project. In this regard, the Landowners have incorporated themselves on January 30, 2006 into four (4) separate stock corporations for the purpose of these corporations replacing their individual personalities in their joint venture agreement with Landco: IEHSDA 1. Gil Jay Palacio, Mary Grace Palacio and Ronald Daniel Palacio formed GIL PALACIO AND CO., INCORPORATED. 2. Rafael C. Palacio Jr. and Jasmin C. Palacio formed OJOS DE AGUA CORPORATION. 3. Geminiano P. Noche and Emily P. Noche formed GNEC LAND REALTY. 4. Dionisio Falgui III, Ma. Diana P. Falgui, Richard Dio Falgui and Jojo F. Alonzo formed DIO AP CORPORATION. The abovementioned corporations' common primary purpose under their Articles of Incorporation is: "to own, use, improve, develop, subdivide, sell, exchange, lease, and hold for investment or otherwise, real estate of all kinds, including buildings, houses, apartments and other structures." In this regard, the Landowners executed four (4) Deeds of Assignment of the properties they originally contributed to the joint venture in favor of each of the respective corporations they subscribed to in exchange for capital stock in said corporations. The Requested BIR Ruling In reply, please be informed that Paragraph 13.0 of the Landowners' joint venture agreement with the developer, Landco, provides that the former may establish a corporation through which they shall execute all acts they undertake to perform under the Project. In exercising this right, the Landowners do not modify any of the terms under the agreement with Landco as they merely replace their individual personalities with the corporations they have formed to represent them in the joint venture. As such, there is no reason for this Office to modify its opinion in BIR Ruling No. DA-656-2004 with respect to the tax consequences of the joint venture, considering that the principal terms of the agreement have not changed in the light of this substitution. In addition, pursuant to BIR Ruling No. DA-656-2004, the assignment of the Landowners' interests in their real property to Landco for purposes of the abovementioned joint venture is regarded as a non-taxable event, considering that this is a transaction merely aimed to effect its capital contribution. Applied to the present situation, the assignment of the Landowners' real properties to the abovementioned corporations should result in the same tax exemption, considering that there was no transfer of these properties to the joint venture and that this was done for the purpose of giving effect to their joint venture agreement with Landco. aTCAcI Accordingly, this Office holds BIR Ruling No. DA-656-2004 is effectively modified as GIL PALACIO AND CO., INCORPORATED, OJOS DE AGUA CORPORATION, GNEC LAND REALTY, and DIO AP CORPORATION are now considered as the new parties representing the previously-named Landowners/co venturers in their joint venture agreement with Landco. However, it stands the same with regard to all its other aspects. 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