BIR Ruling [DA-067-99]

February 5, 1999 BIR RULING [DA-067-99] The Law Firm of Quiason Makalintal Barot Torres & Ibarra 2/F Benpres Building Exchange Road Corner Meralco Avenue Ortigas Center 1600 Pasig City Attention: Atty . Wilfrido E . Sanchez Gentlemen : This refers to your letter dated April 4, 1997 stating that Guevent Industrial Development Corporation (GUEVENT) and Fil-Estate Properties, Inc. (FIL-ESTATE) entered into a Land Trust Investment Agreement for the purpose of undertaking a construction project involving a mixed-use condominium building; that at the appropriate time, a condominium corporation will be created and units of the building will be sold; and that pursuant to the Land Trust Investment Agreement, GUEVENT and FIL-ESTATE agreed, among others, as follows: "1. GUEVENT will contribute its real property located at Epifanio de los Santos Avenue, Barrio Barranca, Mandaluyong City, with an area of 2,022 square meters, and covered by Transfer Certificates of Title Nos. 488569 and 488570 (the "Property"), to the construction project. "2. FIL-ESTATE will undertake the development and construction of the Property into a high-rise mixed-use condominium. "3. As their respective shares in the project, GUEVENT is to receive a share of twenty percent (20%) of the total saleable area, including parking spaces/areas, and exclusive of common areas, while FIL-ESTATE will receive a share of eighty percent (80%) of the total saleable area, including parking spaces/areas, and exclusive of common areas. "4. FIL-ESTATE, as the developer, is to shoulder the expenses for, and undertake, all the development work, construction, and administration, financing, and other related services for the development of the project. Specifically, it shall be responsible for the following: "a. Securing the necessary government and other regulatory permits, license, consents, approvals, authorizations or registration from or with all the appropriate governmental entities; "b. Making, preparing and procuring the technical studies, architectural designs, specifications and plans of the project; "c. Supplying all the necessary heavy equipment and engineering staff to carry out the development of the Property; "d. Purchasing at its expense all materials and supplies, and other similar expenses, for the prosecution of the development works and change orders, including all expenses necessary for and incidental to the development of the Property; and "e. Paying for all expenses and mobilizing the resources required for the development of the real estate property, overseeing the construction and making sure that the works comply with the approved designs, plans, and specifications, and in general executing the said designs, plans, and specifications. "5. After the respective units and/or floors and the parking spaces to be allocated to GUEVENT and FIL-ESTATE are determined, GUEVENT and FIL-ESTATE shall execute a deed of partition or such other document as is necessary, or required by the Register of Deeds or other government body for purposes of the issuance of the condominium certificates of title in their respective names, covering the condominium-units and parking spaces allocated to GUEVENT and FIL-ESTATE. LLjur "6. Prior to any sale or disposition of any condominium unit or saleable area in the project, GUEVENT and FIL-ESTATE shall jointly execute a Master Deed with Declaration of Restrictions for the project. "7. GUEVENT and FIL-ESTATE shall incorporate and organize a condominium corporation, the costs and expenses for which shall be proportionately shared by GUEVENT and FIL-ESTATE. "8. The marketing shall be undertaken exclusively by the affiliated marketing firms of FIL-ESTATE." that because it is provided that GUEVENT will shoulder exclusively certain expenses before the commencement of the project, such as the costs of demolition of existing structures on the Property and the clearing thereof, disturbance fees and other damages for the pretermination of existing lease agreements with the current tenants on the Property, along with legal fees, and other such expenses attendant thereto, GUEVENT will need immediate financing, thus, it will borrow from FIL-ESTATE, in a bonafide Loan Agreement that each of them will independently enter into, the principal amount of Twenty Million Pesos (P20,000,000.00); that the loan will be covered by two promissory notes in the amount of Ten Million Pesos (P10,000,000.00) each, and will bear an interest rate of twelve percent (12%) per annum; and that the term of the loan is one (1) year. Based on the foregoing, you now request for a ruling to confirm your opinions that: "1. The Land Trust Investment Agreement to be executed by GUEVENT and FIL-ESTATE for the purpose of undertaking a construction project, and the joint venture formed as a result thereof, as well as the allocation of units or areas in the project to GUEVENT and FIL-ESTATE, 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 National Internal Revenue Code ("Tax Code"), as amended. "2. In the event that GUEVENT and FIL-ESTATE subsequently sell any unit, floor, or portions of the latter, designated to them as their share, to such third parties as they may so wish, the gain that may be realized by GUEVENT 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 under Revenue Regulation No. 6-85, as amended. The sale will also be subject to documentary stamp tax imposed under Section 196 of the Tax Code. "3. The Deed of Partition to be executed by GUEVENT and FIL-ESTATE over units and parking spaces in the project as their respective shares for purposes of the issuance of individual condominium certificates of title, being likewise a transfer without monetary consideration, will not be subject to income/capital gains taxes, Value-Added Tax, or documentary stamp taxes. "4. The conveyance, of the land and the common areas without any monetary consideration to the condominium corporation formed pursuant to the provisions of the Condominium Act will not result in any income tax, expanded withholding tax, documentary stamp tax under Section 196 of the Tax Code, and Value-Added Tax under Republic Act. No. 7716." In reply, please be informed that pursuant to Section 20(b) of the Tax Code [now 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 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 GUEVENT and FIL-ESTATE for the construction of a mixed-use condominium building is not subject to the corporate income tax under Section 24 of the Tax Code [now Section 27(A) of the Tax Code of 1997]. 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. aisadc Considering the foregoing, your opinions that the Land Trust Investment Agreement executed by GUEVENT, and FIL-ESTATE 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) [now Section 22(B) and 27(A), respectively] of the Tax Code, and that the allocation between GUEVENT and FIL-ESTATE of the floors or units therein and parking slots in consideration of their contribution in the Project, as stipulated in the Land Trust Investment 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, is hereby confirmed. However, should GUEVENT and/or FIL-ESTATE sell any of the floors or portions of the floors allocated to them to third parties, the gain that may be realized by GUEVENT and/or FIL-ESTATE 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 Ruling No. UN-025-95 dated January 11, 1995) Moreover, Section 185 of the Revised Documentary Stamp Tax (DST) Regulations (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 GUEVENT or FIL-ESTATE 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 P15.00 pursuant to Section 1887 of the Tax Code, as amended. In view thereof, your opinions that the Deed of Partition whereby GUEVENT and FIL-ESTATE 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 FIL-ESTATE 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 Ruling No. UN-025-95 dated July 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue