BIR Ruling [DA-081-99]

February 9, 1999 BIR RULING [DA-081-99] Sycip, Gorres, Velayo & Company 6760 Ayala Avenue 1226 Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated July 3, 1997 requesting for ruling on the tax consequences of the proposed Memorandum of Agreement (MOA) to be entered into by Anaprel Development, Inc. (ADI) and Lornarel Properties, Inc. (LPI), as owners, and Active Realty and Development Corporation (ARDC), as developer, for the construction of a high-rise residential building in Mandaluyong City. cdll It is represented that ADI and LPI are corporations duly organized and existing under the laws of the Philippines with principal offices at the 7/F NCR Building, Alfaro corner Herrera Streets, Salcedo Village, Makati City; that they are the owners of six (6) parcels of land in Mandaluyong City with a total land area of 3,361 sq. meters; that ARDC is a corporation duly organized and existing under the laws of the Philippines with business address at the 15/F A.C.T. Tower, 135 Sen. Gil Puyat Avenue, Makati City; that under the proposed MOA between ADI and LPI, as owners of the land and ARDC, as developer, the latter shall construct and develop a high-rise residential building on the said land owned by ADI and LPI; that ARDC shall undertake, among other things, the design, planning, development and management of the project; that as part of its responsibility, ARDC shall likewise defray the entire cost of construction and shall shoulder all project development expenses including preparation of the plans and specifications of the project and segregation of the mother titles and issuance of individual condominium titles; that upon completion of the project, all condominium units, salable carpark slots, club memberships, if any, shall be divided as follows: ADI and LPI 35% and ARDC 65%; that sharing by both parties in accordance with the above scheme shall be by way of an outright and direct assignment to the owners, ADI and LPI, and the developer, ARDC of all condominium units, all salable carpark slots and club memberships; and that ADI, LPI and ARDC shall select their respective 35% and 65% share in the condominium units and carpark slots under an alternating basis. Based on the foregoing representations, you now request confirmation of the following opinion: 1. The Memorandum of Agreement (MOA) entered into by and between ADI and LPI, as owners of the land, and ARDC, as developer, providing for the construction of a high-rise residential building will not create a separate taxable joint venture within the meaning of Section 20(b), in relation to Section 24(a), of the Tax Code; and 2. Since the MOA will not create a separate taxable joint venture, the subsequent assignment of the completed condominium units, carpark slots and club memberships to ADI, LPI and ARDC will not be subject to income tax. In reply thereto, please be informed that to constitute a "joint venture", certain factors are essential: "(a) each party to the venture must make a contribution, not necessarily of capital but by way of services, skill, knowledge, material or money; "(b) profits must be shared among the parties; "(c) there must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise; "(d) usually, there is a single business transaction rather than a general or continuous transaction." (Words and Phrases, Vol. 23. p.230) Likewise, a joint venture is created when two corporations, while registered and operating separately, are placed under one sole management which operates the business affairs of said companies as though constituting a single entity thereby obtaining substantial economy and profits in the operation. (Collector vs. Batangas Transportation, et. al., 102 Phil. 822; See also BIR Ruling Nos. 020(b)-020-80-187-82 dated June 3, 1982; 24-000-00-115-86 dated July 17, 1986; 069-90 dated May 9, 1990 and 254-91 dated November 26, 1991) The proposed MOA to be entered into by and between ADI and LPI, as owners, and ARDC, as developer providing for the construction of the aforementioned high-rise residential building has not by itself created a taxable joint venture. (BIR Ruling No. 317-92 dated October 28, 1992) As a necessary consequence, the subsequent assignment or allocation of the condominium units and car park slots to ADI, LPI and ARDC based on their respective sharings shall not also be subject to income tax (BIR Ruling No. UN-328-94 dated November 22, 1994) considering that the assignment is a mere return of the capital invested by the parties. (Section 36, Revenue Regulations No. 2) Accordingly, your aforesaid opinion on the proposed MOA by and between ADI and LPI, as owners, and ARDC, as developer for the construction of a high-rise residential building in Mandaluyong City are hereby confirmed. 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. llcd Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue