BIR Ruling [DA-085-05]

March 14, 2005 BIR RULING [DA-085-05] Adelina Realty Corporation 7/F La Paz Centre 211 Salcedo Street Legaspi Village Makati City Attention: Mr. Augusto L. Campos, Jr. Gentlemen : This refers to your letter dated January 31, 2005 stating that Adelina Realty Corporation, as the Developer, is a corporation duly organized and existing under the laws of the Philippines with principal office address at the 7th Floor, La Paz Centre, 211 Salcedo Village, Legaspi Village, Makati City; that on the other hand, Carsilex, Inc., as the Owner, is likewise a corporation organized and existing under the laws of the Philippines with principal office address at B. Morada Street, Lipa City, Batangas; that the Owner owns two (2) parcels of land situated it Lipa City, Batangas covered by TCT Nos. 26894 and 26896 issued by the Registry of Deeds for Batangas with an aggregate area of 22,703 square meters; that on January 17, 2005, a Joint Venture Agreement was entered into by and between the Developer and the Owner to develop the aforesaid properties into a prime residential subdivision; that the more salient features of the said Agreement are as follows: "THE PROJECT" 1.1. The Project for this Joint Venture Agreement is the development of the above described properties into a prime residential subdivision which shall be known as the ADELINA HOMES-LIPA EXTENSION; 1.2. The area subject of this Joint Venture Agreement is TWENTY TWO THOUSAND SEVEN HUNDRED THREE (22,703) SQUARE METERS, more or less, to be developed in the following manner: (a) To be developed as residential saleable lots and jointly marketed, inclusive of open spaces, roads, etc. 20,403 sq. m. (b) To be developed but retained by the owner due to provisional plans for a chapel, etc. 2,300 sq. m. "SHARING IN SALEABLE LOTS/OPEN SPACE: 1.3. Parties hereby agree that ownership of the resultant saleable lots shall be divided between the parties in the following manner, to wit: AIaDcH DEVELOPER - 60% OWNER - 40% 1.4. The allocation of saleable lots as well as the description and particulars of the excluded area of 2,300 square meters, more or less, shall be reflected in the development map; 1.5. Open spaces shall be maintained as thirty-five percent (35%) of the total project area. Any excess thereof may, with the consent of OWNER, be converted by the DEVELOPER into saleable lots. "POSSESSION, CUSTODY/RELEASE OF TITLES 1.6. Upon the execution of this Joint Venture Agreement, OWNER shall turn over and keep DEVELOPER in peaceful possession of the properties subject of the Agreement. OWNER warrants that the same are free from all forms of liens, encumbrances and not covered by CARP not planted to rice or corn; 1.7. The titles to the properties subject of the Agreement shall likewise be delivered by the OWNER to the DEVELOPER immediately upon the execution of this Joint Venture Agreement, for purposes of facilitating the conversion of the properties from agricultural to residential and the approval of the subdivision plan. that pursuant to the Joint Venture Agreement, the DEVELOPER is supposed to develop the parcels of land into a prime residential subdivision within a period of twelve (12) months from the time of the conversion of the area into a residential class; and that the OWNER is supposed to turn over peaceful possession of the properties and deliver the titles thereto to the DEVELOPER. Based on the foregoing representations, you now request the tax consequences on the following: "1. What would be the taxes involved when Carsilex, Inc. transfers to Adelina Realty Corporation, its 60% share of the total saleable lots for its development of the project; "2. What would be the taxes involved when Carsilex, Inc. transfers to Adelina Realty Corporation the 35% corresponding to the open spaces and road lots, which pursuant to the paragraph 6.1. of the Joint Venture Agreement shall be registered and turned over to the DEVELOPER upon the completion of the project; "3. Would there be capital gains tax, documentary stamp tax and VAT, when the parties eventually execute a Deed of Assignment for the resultant lots in the project; and "4. What would be the taxes involved when Adelina Realty Corporation eventually sells its share of saleable lots to third parties." In reply thereto, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, the term corporation includes partnership, 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. THIcCA It is to be emphasized, however, that P.D. 929 excluded joint venture formed for the purpose of undertaking construction projects from the definition of the term "Corporation" because (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; and (4) To assist them in achieving competitiveness with foreign contractors. 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 holds that the JVA entered into by the Adelina Realty Corporation, as the Developer, and Carsilex, Inc., as the Owner, for the development of the aforesaid properties into a prime residential subdivision known as the Adelina Homes Lipa Extension is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. Accordingly, the tax consequences shall be as follows: (1) & (2) The transfer of the aforesaid properties or 60% of its share in the saleable lots and the 35% corresponding to the open spaces and road lots by Carsilex, Inc., as the Owner, to Adelina Realty Corporation, as the Developer, pursuant to their JVA is not subject to the capital gains tax and to the documentary stamp tax under Sections 24(D)(1) and 196 of the Tax Code of 1997. However, the certification is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the said Code. However, the co-venturers are separately subject to the regular corporate income taxes on their respective taxable income during each taxable year derived by them from the aforesaid construction project and the sale of the aforesaid properties shall be subject to the documentary stamp tax under Section 196 of the said Code. Moreover, the allocation and distribution of their respective shares in the project consisting of developed lots and the housing structures built thereon in consideration of their respective contributions, as stipulated in the JVA is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. ( BIR Ruling Nos. 10-96 dated January 23, 1996; DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998 ) (3) & (4) The partition to be executed by the parties allocating and distributing between them their respective shares in the project in exchange for their respective contributions is without monetary consideration but merely acknowledges and confirms the title and ownership of the above-named parties, Carsilex, Inc., as the Owners and Adelina Realty Corporation, as the Developer, the same is not subject to the value-added tax, income/creditable withholding tax nor to the documentary stamp tax respectively imposed under Sections 106, 24(c), 27(A) as implemented by Revenue Regulations No. 2-98, as amended and 196 all of the Tax Code of 1997. However, the sale of the respective share of Carsilex, Inc. and/or Adelina Realty Corporation of the aforesaid properties shall be subject to the creditable withholding tax, VAT and documentary stamp tax pursuant to Revenue Regulations No. 2-98, as amended, Sections 106(A) and 196 of the Tax Code of 1997. IEDaAc Finally, this will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by Adelina Realty Corporation and Carsilex, Inc. based on their respective allocations pursuant to the partition without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. 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