BIR Ruling [DA-086-97]

March 4, 1997 BIR RULING [DA-086-97] Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . E . C . Alcantara Gentlemen : This refers to your letter dated December 2, 1996 stating that your client, Facilities, Inc., (FI) is the registered owner of four (4) parcels of land located along Shaw Boulevard, Mandaluyong, Metro Manila, and covered by Transfer Certificate of Title Nos. 2917, 2918, 2919 and 2920 issued by the Register of Deeds of Mandaluyong; that at the own expense of FI, it commenced the construction of a 46-story residential condominium building, called the "Palladium Summit" on the said four (4) parcels of land; that it has been determined that conditions of the market make it feasible to complete the Palladium Summit as an office condominium building including a parking building (the Project); that to complete the construction of the "Project", FI and a consortium of Developers have entered into a Development Agreement which provides, among other the following: cdtech 1. Facilities, Inc. will contribute the following a. the unfinished building presently constituting the Palladium Summit, the four (4) parcels of land above-mentioned, the tower crane and material hoist presently erected at the site, and all existing building plans and specifications, as well as copies of all permits, licenses, and approvals issued to it, and such other documents in its possession, in respect of the Palladium Summit, as may be reasonably required; b. Pay for 48% of the cost of constructing the parking building in accordance with specifications, design, and costs to be agreed among the parties; and c. Pay for all real estate taxes accruing on the four (4) parcels of land above-mentioned, and its improvement for the period ending December 31, 1994, and pay for 48% of all such taxes and assessments accruing thereafter. 2. The Developers shall contribute the following a. P250 Million Pesos in the manner set forth in the pertinent provisions of the Development Agreement for the completion of the Palladium Summit as an office condominium building in accordance with specifications, design, and costs to be agreed among the parties; b. Pay for 52% of the cost of constructing the Parking Building in accordance with specifications, design, and costs to be agreed among the parties; and c. Pay for 52% of all real estate taxes and assessments accruing on the property and its improvements for the period commencing on January 1, 1995. that as full and complete considerations and in return for their respective contributions, FI and the Developers will acquire ownership of specific floors or portions thereof and parking slots upon completion of the Project; that however, the common areas, the ground and mezzanine floors of the Palladium Summit, and the ground and second levels of the parking building will be co-owned by FI and the Developers in the proportion of 48% and 52%, respectively; that as soon as possible after the Project is completed, FI and the Developers will form a condominium corporation to hold title, manage and maintain the lands on which the Projects stand, as well as the common areas of the Project, pursuant to the provisions of Republic Act No. 4726, otherwise known as the Condominium Act; that for this purpose, FI and the Developers will execute a Deed of Assignment in favor of the condominium corporation without any monetary consideration. You now request on behalf of your client, Facilities, Inc., for a ruling to confirm your opinions that: 1. The Development Agreement executed by FI and the Developers for the construction and development of the Project, and the allocation of specific floors or portions thereof and any accompanying parking slots in the Project will not give rise to a separate taxable joint venture within the meaning of Section 20(b), in relation to Section 24(a) of the Tax Code; 2. The allocation between and among the parties of the floors or portions thereof and parking slots in consideration of their contribution in the Project, as stipulated in the Development Agreement, is not a taxable event and is not subject to income/withholding tax, because the allocation is a mere return of the capital that each has contributed to the Project; and 3. The Deed of Assignment to be executed by FI and the Developers conveying without monetary consideration, the land and common areas of the Project in favor of the condominium corporation formed pursuant to the Condominium Act will not be subject to income tax, expanded withholding tax and documentary tax. In reply, please be informed that pursuant to Section 20(b) of the Tax Code, as amended, 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 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 FI and its Developers for the construction of the Palladium Summit and a parking building (the Project) is not subject to the corporate income tax under Section 24 of the Tax Code. 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, your opinions that the Development Agreement to be executed by FI and its Developers for the construction of the Project and the allocation of specifically designated number of floors and parking slots among the parties 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, as amended, and that the allocation between and among the parties of the floors or portions thereof and parking slots in consideration of their contribution in the Project, as stipulated in the Development Agreement, is not taxable even and is not subject to income/withholding tax, because the allocation is a mere return of the capital that each has contributed to the Project, are hereby confirmed. However, should FI and/or its Developers sell any of the floors or portions of the floors allocated to them to third parties, the gain that may be realized by FI and/or the Developers from such sale will be subject to the regular 35% corporate income tax under Section 24 of the Tax Code, and to the creditable/expanded withholding tax (EWT) under Revenue Regulations 6-85, as amended. (BIR Rulings No. 274-92 dated September 30, 1992; BIR Rulings No. UN-328-94 dated November 22, 1994). Moreover, Section 185 of the Revised Documentary Stamp Tax (DST) Regulations (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 aforementioned Deed of Conveyance is without consideration and is not in connection with a sale made to the condominium corporation, no income was generated and a fortiori, no creditable EWT and DST are payable and collectible. However, the acknowledgment to said Deed of Conveyance is subject to DST of P15.00 pursuant to Section 188 of the Tax Code, as amended. In view thereof, your opinion that the Deed of Conveyance to be executed by FI and the Developers conveying, without monetary consideration, the land and the common areas of the Project in favor of the condominium corporation formed pursuant to the Condominium ACt will not be subject to income tax, EWT and DST under Section 196 of the Tax Code, as amended, is also hereby confirmed. (BIR Rulings No. 349-93 dated July 30, 1993; BIR Rulings No. UN-328-94 dated November 22, 1994). However, it has been consistently ruled by this Office that to constitute a "joint venture" certain factors are essential: lexlib "(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 share among the parties; "(c) there must be a joint proprietary interest and right of mutual control over the subject matter of the enterprises; and "(d) usually, there is single business transaction rather than a general or continuous transaction" (Words and Phrases, Vol. 23, p. 230)" Likewise, a joint venture was created when two corporations while registered and operating separately were placed under one sole management which operated the business affairs of said companies as though constituted a single entity thereby obtaining substantial economy and profits in the operation (Collector vs. Batangas Transportation et. al. 102 Phil. 822 See also BIR Rulings 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). Consequently, the joint venture to be subsequently entered into by and between FI and the Developers, in the common ownership of the ground and mezzanine floors of the Palladium Summit, and the ground and second levels of the parking building in the proportion of 48% and 52%, respectively, is a joint venture subject to tax under Section 24(a) of the Tax Code, as amended, separate and distinct from FI and its developers. Moreover, income derived from the commonly owned ground and mezzanine floors of the Palladium Summit, and the ground and second levels of the parking building, are income to the subsequent joint venture. Furthermore, the distribution by the subsequent joint venture of its net income to FI and the Developers are in the nature of dividends which are not subject to tax under Section 24(e)(4) of the Tax Code, as amended. 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 b considered null and void. (BIR Ruling No. 317-92 dated October 28, 1992). Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)