BIR Ruling [DA-065-97]

February 10, 1997 BIR RULING [DA-065-97] Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . M . F . A . Balili Gentlemen : This refers to our letter dated October 24, 1996 stating that Davao Motor Sales Company (DMSC) and Ayala Land, Inc. (ALI) entered into a Memorandum of Agreement for the development and construction of a first-class, high rise residential condominium to be known as the Regency of Salcedo (the Project) located at Salcedo Village, Makati City; that pursuant to the Memorandum of Agreement, DMSC and ALI agreed, among others, as follows: a) DMSC will contribute its two (2) parcels of land situated in Salcedo Village, Makati City, with a total area of 2,200 sq.m., more or less, as the site of the Project, while ALI will contribute all costs and the skills necessary for the development and construction of the Project. b) In return for their respective contributions to the Project, DMSC and ALI will each acquire separate ownership of specifically designated whole floors or condominium units and parking slots in the project, in proportion to their respective contributions to the Project; and c) The Project will be constituted into a condominium project under the Condominium Act (R. A. 4726, as amended), and a condominium corporation will be formed to hold title to the land and the common areas in the Project. that for the purpose of allocating to ALI its 74% share, and to DMSC its 26% share, of the units and parking slots in the Project, a Deed of Partition was executed by ALI and DMSC, whereby the parties adjudicated full and exclusive title over the units and parking slots in the Project, in proportion to their respective contributions to the Project; and that in accordance with the provisions of the Condominium Act, DMSC will execute a Deed of Conveyance, whereby DMSC will transfer the land without monetary consideration to the condominium corporation, so that the condominium corporations will hold title to the land and the common areas in the Project. You now request for a ruling to confirm your opinions that: 1. The Memorandum of Agreement executed by ALI and DMSC for the construction and development of the Project, and the allocation of their specific floors or units therein and parking slots in the Project will not give rise to a separate taxable joint venture within the meaning of Section 20(b), in relation to Section 24(a) of the Tax Code; 2. The allocation between ALI and DMSC of the floors or units therein and parking slots in consideration of their contribution in the Project, as stipulated in the Memorandum of Agreement, is not a taxable event and is not subject to income/withholding tax, because the allocation is a mere return of the capital that each has contributed to the Project; 3. The Deed of Partition whereby ALI and DMSC will allocate unto each other their respective shares in the floors or units and parking slots in the Project, in consideration of their respective contributions in the Project, is also not subject to documentary stamp tax imposed under Section 196 of the Tax Code, because the allocation is made without monetary consideration and is not in connection with a sale. Instead, the partition is made merely to segregate the floors or units and parking slots between the parties, as the return of the capital which each contributed to the Project; and 4. The Deed of Conveyance to be executed by DMSC to convey the land without monetary consideration to the condominium corporation formed pursuant to the condominium Act will not be subject to income tax, expanded withholding tax and documentary tax. In reply, please be informed that pursuant to Section 20(b) of the Tax Code, as amended, the term corporation includes partnerships, now matter how created or organized, joint stock companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not include general or 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. In view thereof, it is our opinion that the joint venture of DMSC and ALI for the construction of the "Regency of Salcedo" is not subject to the corporate income tax under Section 24 of the Tax Code. However, the co-ventures 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. LLjur Considering the foregoing, your opinions that the Memorandum of Agreement executed by ALI and DMSC for the construction and development of the Project, and the allocation of their specific floors or units therein and parking slots in the Project will not give rise to separate taxable joint venture within the meaning of Section 20(b), in relation to Section 24(a) of the Tax Code, and that the allocation between ALI and DMSC of the floors or units therein and parking slots in consideration of their contribution in the Project, as stipulated in the memorandum of Agreement, is not taxable event and is not subject to income/withholding tax, because the allocation is a mere return of the capital that each has contributed to the Project, is hereby confirmed. However, should DMSC and/or ALI sell any of the floors allocated to them to third parties, the gain that may be realized by DMSC and/or ALI from such sale will be subject to the regular 35% corporate income tax under Section 24 of the Tax Code, and to the creditable/expanded withholding tax (EWT) under Revenue Regulations 6-85, as amended. (BIR Ruling No. 274-92 dated September 30, 1992; BIR Rulings No. UN-025-95 dated January 11, 1995). Moreover, 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 aforementioned Deed of Partition and Deed of Conveyance are without consideration and are not in connection with a sale made to DMSC or ALI and the condominium corporation, respectively, no income was generated and a fortiori, no creditable EWT and DST are payable and collectible. However, the acknowledgment to said deed of Partition and Deed of Conveyance are subject to DST of P=15.00 pursuant to Section 188 of the Tax Code, as amended. In view thereof, your opinions that the Deed of Partition whereby ALI and DMSC allocate unto each other their respective shares in the floors or units and parking slots in the Project, in consideration of their respective contributions in the Project, and that the Deed of Conveyance to be executed by DMSC to convey the land to a condominium corporation formed pursuant to the Condominium Act, considering both are without monetary consideration, will not be subject to income tax EWT and DST under Section 196 of the Tax Code, as amended, are also hereby confirmed. (BIR Ruling No. 207-92 dated July 16, 1992; BIR Ruling No. 349-93 dated July 30, 1993; BIR Rulings No. UN-025-95 dated January 11, 1995). 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. (BIR Ruling No. 207-92 dated July 16, 1992; BIR Ruling No. 317-92 dated October 28, 1992). Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)