BIR Ruling [DA-069-02]

April 15, 2002 BIR RULING [DA-069-02] 22 (B), 27 (A), 196, 57 (B) DA-240-2001 Filinvest Alabang, Inc. FAI Administration Bldg. Filinvest Corporate City Alabang, Muntinlupa City Attention: Mr. Efren M. Reyes Senior Vice President Gentlemen : This refers to your letter dated November 29, 2001, stating that Filinvest Alabang, Inc. (FAI) a corporation engaged in the business of real estate development, will enter into Project Investment Agreements with East West Banking Corporation (EWBC) and different Investors for the development and construction of a 28-storey residential condominium building to be known as "Pioneer Pointe" (hereinafter referred to as the "Project"); that the aforestated Project will be constructed on a parcel of land owned by EWBC located at Pioneer Street, Mandaluyong City which is covered by Transfer Certificate of Title (TCT) No. 13480 of the Registry of Deeds for Mandaluyong City with an area of 1,400 square meters whose zonal value is P29.4 million at P21,000 per square meter; and that the Project Investment Agreements have the following provisions, among others: a. With respect to the Project Investment Agreement between FAI and EWBC, it is stated that EWBC commits to invest its parcel of land covered by TCT No. 13480 as its capital contribution to the Project. In consideration of such capital contribution, EWBC shall be entitled to a pro rata ownership share in the Project, and to full ownership to condominium units and parking spaces appurtenant thereto. b. The Project Investment Agreement between FAI and the Investors provides that each Investor commits to invest in the Project through a capital contribution for the financing and/or funding of the Project. Such investment is in an amount equivalent to a percentage share in the total cost of development of the Project. The share of the Investor will be computed based on the estimate of the actual cost of the floor area of a particular condominium unit, subject to any cost adjustment arising from changes in the actual cost and/or the floor area. In return for his capital contribution each Investor will receive the corresponding Condominium Certificate of Title for the condominium unit and its appurtenant parking space. c. The Investor will open a Trust Account with a Trustee-Bank where his capital contribution and any additional contributions will be held, managed and disbursed. The Trustee-Bank shall hold in trust the capital contribution and title to the Project. If the Investor is a corporation, it may execute in lieu of the Trust Agreement, an Investment Management Agreement. Prior to the construction of the Project, every Investor shall deposit 30% of his required capital contribution to the Trust Account. He will then deposit the remaining 70% through internally generated funds and/or by availing of a construction credit line during the construction period. Upon completion of the Project, any excess funds or properties of the Trust Account, including ownership over the condominium units and its appurtenant parking spaces, shall be released to the Investors. d. The Trustee-Bank shall review and approve all disbursements for the Project and for the account of the Investor, and shall hold custody of any and all documents relating thereto. Upon approval of each disbursement, the Trustee-Bank shall debit from the Trust Account of the Investor the pro rata share of the Investor in such disbursement and issue a check payable directly to the approved payee thereof. e. FAI will be the Project Manager of the Project. It will be authorized to, among others, negotiate and execute contracts as may be required for the development of the Project with architects, construction management engineers, general building contractors, and other parties deemed fit and necessary by FAI for the construction of the Project; to do the marketing and advertising of the Project concept to secure sufficient number of Investors; to secure the necessary permits and licenses that may be required; and to do other acts necessary in the expeditious development of the Project. In return, FAI will receive a management fee. f. Prior to the completion of the Project, an Investor can assign his participation, rights and proportionate interest in the Project provided it secures the written consent of FAI. g. Upon completion of the Project, EWBC and the Investors will form a condominium corporation for the purpose of holding title to, manage and maintain the land and the common areas of the Project pursuant to the provisions of the Condominium Act. Subsequently, the ownership of the common areas will be conveyed to the condominium corporation. You now request for a confirmation of the following that: "1. The Agreements will not give rise to separate taxable joint ventures within the meaning of Section 20(b) in relation to Section 24(a) of the National Internal Revenue Code (NIRC), as amended. Hence, the unincorporated joint ventures created by the parties are not subject to the corporate income tax under Section 24 of the NIRC. "2. The conveyance of the parcel of land from EWBC to the condominium corporation as its capital contribution is not subject to income tax and value-added tax (VAT). "3. The assignment of rights by an Investor with respect to the Project Investment Agreement between FAI and an Investor is not subject to capital gains tax, creditable withholding tax, VAT and documentary stamp tax under Section 196 of the NIRC. "4. The distribution of the condominium units and appurtenant parking slots to EWBC and the Investors, as a return of their capital contributions, is not subject to income tax, VAT and documentary stamp tax under Section 196 of the NIRC. "5. The conveyance of the common areas in the condominium without any monetary consideration to a condominium corporation is not subject to income tax, VAT and documentary stamp tax under Section 196 of the NIRC." In reply, please be informed as follows: 1. Pursuant to Section 22(B) of the Tax Code of 1997, 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 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. P.D. No. 29 amended the definition of the taxable corporation as not to include joint venture formed for the purpose of undertaking construction projects. The reasons for such amendment are: (1) Local contractors contribute substantially to the development program of the country; (2) Local contractors are at a disadvantage in competitive bidding with foreign contractors in view of limited capital and financial resources; (3) In order to be able to compete with big foreign contractors, it may be necessary for them to enter into joint ventures to pool their limited resources in undertaking big construction projects; (4) To assist them in achieving competitiveness with foreign contractors, the joint ventures formed by them should not be considered as additional income tax lien. Considering that it is the intention of the legislature to exclude joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, this Office is of the opinion as it hereby holds that the joint venture entered into by and between FAI and EWBC, and by and between FAI and the Investors, are not subject to income tax under Section 27 of the Tax Code of 1997. However, FAI, EWBC and the Investors are separately subject to the regular income tax on their income during such taxable year respectively derived by them from the construction project (BIR Ruling No. DA-240-2001 dated November 16, 2001) 2. The conveyance of the parcel of land from EWBC to a condominium corporation as its capital contribution to the Project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax. Such conveyance is but a capital contribution to the joint venture and therefore, not a taxable event. The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing the parcel of land, EWBC neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) 3. The assignment of rights under the Project Investment Agreement by an Investor is not subject to capital gains tax, creditable withholding tax, VAT and the documentary stamp tax under Section 196 of the 1997 Tax Code. Such transaction does not partake the nature of a sale or assignment of real property. In an assignment rights, the assignee merely steps into the shoes of the assignor without acquiring a better right than what the assignor had in the property to which the rights assigned pertains. A deed of assignment of rights in real property is not a deed of sale of real property itself but only the rights pertaining to such property. (BIR Ruling No. DA-240-2001 dated November 16, 2001 and BIR Ruling No. DA-252-96 dated July 18, 1996) 4. The distribution of condominium units and appurtenant parking spaces of the Project to FAI, EWBC and the Investors in consideration of their respective contributions, as stipulated in the Project Investment Agreements is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. However, upon the subsequent disposition by the co-venturers of the areas allocated to them, the gain that may be realized by them from such sale will be subject to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, based on the gross selling price or fair market value of the properties, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. Since the said transfer is a mere return or distribution of FAI, EWBC and the Investors of their investment in the unincorporated joint venture, the transaction being not in the nature of a sale, barter, exchange or lease of goods and properties, or rendering services as defined under Section 105 of the Tax Code of 1997. The transfer of the ownership of condominium units to FAI, EWBC and the Investors is not therefore subject to VAT. The Partition Agreement whereby FAI, EWBC and the Investors will allocate unto each other their share in the saleable area, in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the saleable area between the parties as the return of the capital which each contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-240-2001 dated November 16, 2001) 5. The transaction transferring to the condominium corporation the management of the common areas of the aforesaid Project will not be subject to creditable withholding tax pursuant to Section 57(B) in relation to Section 27 of the Tax Code of 1997. Neither it is subject to the documentary stamp tax imposed under Section 196 of the same Code, because conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable. But the notarial acknowledgment to said deed is subject to the documentary stamp tax 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, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service