BIR Ruling [DA-083-99]

February 11, 1999 BIR RULING [DA-083-99] Tinoco Tinoco & Associates Suite 108 Ledesma Building II Real cor. General Luna Streets Intramuros, Manila Attention: Atty . Reinerosa S . Tinoco Gentlemen : This refers to your letter dated September 22, 1998 and January 5, 1999 stating that Friday Associates Marketing Enterprises, Inc. and Westville Realty and Development Corporation entered into a Joint Venture Agreement for the development and construction of a condominium building to be known as West Trade Center (the Project) located at No. 132 West Avenue, Quezon City; that pursuant to the Joint Venture Agreement, Friday Associates Marketing Enterprises, Inc. and Westville Realty and Development Corporation agreed, among others, as follows: aisadc a) Friday Associates Marketing Enterprises, Inc. (formerly Gannet Mercantile Corporation) will contribute its parcel of land situated in No. 132 West Avenue, Quezon City, with an area of 714 square meters, more or less, covered by Transfer Certificate of Title No. 253880 issued by the Registry of Deeds of Quezon City, Metro Manila as the site of the Project, while Westville Realty and Development Corporation shall undertake at its own expense the land and site development, the construction of at least ten (10) storey building; b) In return for their respective contributions to the Project, Friday Associates Marketing Enterprises, Inc. and Westville Realty and Development Corporation will each acquire separate ownership of specifically designated whole floors or condominium units and parking slots in the Project; and that the developer, Westville Realty and Development Corporation due to financial constraints brought about by the tight economic situation in the country entered into a joint venture agreement with five (5) investors, namely: Eastgate Property Holdings Corporation; D' New Bataan Concrete Products Corporation; Lamco Paper Products Company, Inc.; Christopher Tan Go; and Robert Uy Que who infused a substantially large financial capital to complete the Project and that allocation of ownership of certain floors, units or parts of the building will go to the five (5) investors as return of capital. In reply, please be informed that 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 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 Friday Associates Marketing Enterprises, Inc. and Westville Realty and Development Corporation which entered into another joint venture agreement with five (5) investors for the construction of the "West Trade Center" is not subject to the corporate income tax under Section 27 of the Tax Code of 1997. However, the co-ventures and the five (5) investors 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 Agreement executed by Friday Associates Marketing Enterprises, Inc. and Westville Realty and Development Corporation together with the five (5) investors 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 22(B), in relation to Section 27(A) of the Tax Code of 1997, and that the allocation between Friday Associates Marketing Enterprises, Inc. and Westville Realty and Development Corporation and the five (5) investors of the floors or units therein and parking slots in consideration of their contribution in the Project, as stipulated in the Joint Ventures Agreements, are not taxable event and are not subject to income/withholding tax because the allocation is a mere return of the capital that each has contributed to the Project. However, should Friday Associates Marketing Enterprises, Inc. and Westville Realty and Development Corporation and the five (5) investors sell any of the floors or portions of the floors allocated to them to third parties, the gain that may be realized by them from such sale effective January 1, 1999 will be subject to the regular 33% corporate income tax under Section 27 of the Tax Code of 1997, 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; and BIR Ruling No. DA-488-98 dated November 16, 1998), and necessarily, the said transaction shall be subject to the documentary stamp tax imposed under Section 196 of the same Code. 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 avoid. (BIR Ruling No. 207-92 dated July 16, 1992; BIR Ruling No. 317-92 dated October 28, 1992). cdll Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue