BIR Ruling [DA-069-05]

March 2, 2005 BIR RULING [DA-069-05] Section 22 (B) S30-27-03; DA-011-03 & DA-043-2004 The Metropolitan Club Inc . Estrella cor. Amapola Sts. Guadalupe Viejo Makati City Attention: Mr. Francisco J. Buencamino Gentlemen : This refers to our letter dated January 24, 2005 requesting for confirmation of your opinion on the tax consequences of the proposed Joint Venture Agreement (JVA) by and between The Metropolitan Club Inc. (Metroclub) and Philippine Townships, Inc. (Philtown). It is represented that Metroclub is a non-stock, nonprofit corporation organized for the conduct of recreational, sports and athletic activities, as well as for social, cultural and educational purposes; that it was duly registered with the Securities and Exchange Commission (SEC) on June 27, 1975 under SEC Registration No. 62163; that as such organization, it has been granted tax-exempt status under Section 30 of the Tax Code of 1997 under BIR Ruling No. S-30-011-2002 dated April 11, 2002; that Metroclub is the registered owner of two (2) parcels of land located along Estrella Street, Makati City, having a total area of about 1.2 hectares and covered by Transfer Certificates of Title (TCT) Nos. 220844 and 220505; that Metroclub proposes to enter into a JVA with Philtown, whereby Metroclub will contribute a 2,267 square meter portion (Property) of the said land and Philtown will contribute its development expertise and resources, including cash to defray construction expenses, for the purpose of developing the Property into a multi-storey residential condominium building (Project); that the JVA provides for the following terms and conditions: 1) Metroclub will contribute the Property, while Philtown will contribute its development expertise and resources, including cash to defray construction expenses, for purposes of the Project. 2005cdtai 2) Upon completion of the Project, and in return for their respective contributions, each party to the JVA will acquire and be allocated a specific number of floor space/units and parking spaces in the Project. In implementing the allocation, condominium certificates of title will be issued to each party covering the units and parking spaces allocated to it in return for their contribution to the Project. HDTSCc 3) In connection with no. 2 above, Metroclub will be given the option to be paid P103,276,000 in cash and 20 tandem or 15 single parking slots in the multi-storey residential condominium building, in lieu of being allocated saleable units equivalent to P113,350,000. This is in line with the purpose of the joint venture raising funds for Metroclub to be used for the renovation of its clubhouse and the refurbishing and addition of club facilities. 4) Philtown will actively market and sell the condominium units, including those allocated to Metroclub, if any, using its own sales organization. For units allocated to Metroclub, Philtown will likewise collect from buyers of the in behalf of Metroclub. 5) Philtown and Metroclub will form a condominium corporation that will hold title to, manage and maintain the land and the common areas pursuant to the provision of Republic Act No. 4726, as amended, known as the Condominium Law. For the purpose, the aforesaid parties will transfer the land and the common areas to the condominium corporation, without any monetary consideration, by executing a Deed of Conveyance in favor of the said corporation. 6) Each condominium unit shall be linked to a membership in Metroclub which allow the owner or occupant to use the facilities of Metroclub. With this arrangement, the patronage and usage of the facilities of Metroclub will increase to strengthen its capability to provide recreational, sports, and athletic activities for the welfare of its general membership pursuant to its purposes as a non-stock, nonprofit corporation. that the allocation of saleable floors/units/parking spaces to Metroclub is merely a conversion of the property owned by Metroclub into a developed and, therefore, marketable form; that the proceeds from the sale of the floors/units/spaces allocated to Metroclub will be used by Metroclub for the renovation of its existing clubhouse and the refurbishing and addition of facilities for the sports club; and that the sale is also expected to strengthen Metroclub's financial capability by providing working capital to efficiently operate the club and service its existing debts. In view of the foregoing, you now request confirmation of your opinion that 1) The JVA and the allocation of saleable units and parking spaces pursuant thereto will not give rise to a separate taxable joint venture within the meaning of Section 22(B) of the Tax Code. 2) The allocation, pursuant to the JVA, of the saleable units and parking spaces among the parties thereto, in consideration of their respective contributions is not a taxable event, and is thus, not subject to income/withholding tax, the allocation being a mere return of the capital that each has contributed to the Project. The allocation is also not subject to DST considering that the same is not made in connection with a sale. 3) The sale by Metroclub of the units and parking spaces allocated to it will not be subject to income tax (whether capital gains or withholding tax) nor to the value-added tax, since the proceeds from the sale will be used exclusively in furtherance of its purposes as a non-stock, nonprofit organization as stated in its Articles of Incorporation. The Deed of Conveyance in favor of the condominium corporation without monetary consideration and merely to comply with the Condominium Law is not subject to income tax, withholding tax or DST. In reply, please be informed as follows: 1) Pursuant to Section 22(B) of the Tax Code of 1997, the term "corporation" shall include 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. Such being the case, the joint venture that will be formed as a result of the JVA by and between Metroclub and Philtown for the construction of a multi-storey residential condominium building is not subject to the corporate income tax under Section 27(A) of the Tax Code of` 1997. However, the co-venturers 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. Considering the foregoing, the joint venture of Metroclub and Philtown for the construction and development of the Project will not create a taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997. 2) The allocation of their specific floors or units therein and parking slots in the Project in consideration of their contribution in the Project, as stipulated in the JVA, and the issuance of the corresponding condominium Certificate of Title by the Registry of Deeds of Makati City to Metroclub and Philtown representing their respective shares or participating interests in the Project as stipulated in the JVA is not a taxable event. The same is therefore, not subject to income, withholding, value-added and documentary stamp taxes. Nonetheless, the acknowledgment to the Deed is subject to documentary stamp tax under Section 188 of the Tax Code of 1997. 3) Although non-stock, nonprofit associations contemplated under Section 30 of the Tax Code of 1997 are exempt from the payment of income tax on income received by it as such organization, however, it is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code on its income derived from any of its properties, real or personal, or any activity conducted for profit regardless of the disposition thereof, which income should be returned for taxation. Moreover, Section 105 of the Tax Code of 1997 provides that 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 the value-added (VAT) imposed in Sections 106 to 108 of the same Code. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. If you are engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, in general, you shall also be liable to VAT (BIR Ruling No. S30-27-2003 dated November 21, 2003 & DA-043-2004 dated February 4, 2004). Accordingly, it is only upon sale or disposition of the units allocated to Metroclub and Philtown to third parties that the gain realized by the parties in the said transaction will be subject to the regular 35% (now 32%) income tax under Section 27(A) of the Tax Code of 1997, the creditable withholding tax under Revenue Regulations No. 2-98, as amended and the value-added tax under Section 106 of the Tax Code of 1997. The transfer of the said properties to third parties shall likewise be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the consideration or the fair market value of the property being transferred, whichever is higher. 4) 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 Deed of Conveyance and Deed of Partition to be executed by Metroclub and Philtown are without consideration and are not in connection with a sale made to Metroclub and Philtown and the condominium corporation. respectively, no income was generated and a fortiori, no creditable withholding, value-added and documentary taxes are payable and collectible. However, the acknowledgment to said Deed of Conveyance and Deed of Partition are subject to DST of P15.00 pursuant to Section 188 of the Tax Code of 1997. In view thereof, the Deed of Conveyance to be executed by Metroclub and Philtown to convey the land to a condominium corporation and pursuant to the Condominium Act and the Deed of Partition whereby Metroclub and Philtown 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, considering that both are without monetary consideration, will not be subject to income, withholding, value-added and documentary stamp taxes under Section 196 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group