BIR Ruling [DA-096-00]

February 15, 2000 BIR RULING [DA-096-00] Paras Reynes Manlapaz, & Marapao Suite 7G, Vernida I Condominium 120 Amorsolo St., Legaspi Village Makati City Attention: Atty . Noel G . Liok Gentlemen : This refers to your letter dated December 1, 2000 requesting for a ruling on the exemption from capital gains, documentary stamp and creditable withholding taxes relative to the joint venture agreement executed by your client Swiss American Lending Corporation (Swiss American) with Cedar Property Management Corporation (Cedar). Documents submitted disclosed that Cedar a corporation duly organized and existing under Philippine laws is the registered and absolute owner of a parcel of land covered by Transfer Certificate of Title (TCT) No. S-100035 located at Makati City; that Cedar constructed and developed said parcel of land a 5-storey residential condominium building known as the Our Lady off Guadalupe Condominium Project; that through a credit extended by Pilipinas Bank as per mortgage Loan Agreement the aforementioned project was finalized to its present progress of construction, which is approximately 75% complete; that Cedar wishes to finalize the above-stated project with the financial assistance of Swiss-American; that Swiss American is a corporation organized under the laws of the Philippines; and Cedar entered into a Joint Venture Agreement dated March 5, 1998 with Swiss American to finalize the construction of said condominium project in which they agreed on the following: xxx xxx xxx "1. JOINT VENTURE PARTICIPATION "THE INVESTORS WILL MAKE AVAILABLE SIX MILLION PESOS (P6,000,000.00) IN TRANCHE AS REQUIRED BY THE BUILDING PROGRESS AND ACCORDING TO THE MUTUALLY APPROVED BUDGET ATTACHMENT 6 , FOR A SHARE OF 50% OF ALL SALEABLE AND FOR RENT FLOOR SPACE ATTACHMENT 8 . "THE INVESTMENT OF 6 MILLION PESOS ARE TO BE USED FOR PAYMENTS OF OUTSTANDING BILLS AS PER ATTACHMENT 7 AND FUTURE COSTS TO FINALIZE THE PROJECT AS PER ATTACHMENT 6 INCLUDING INTEREST PAYMENTS DUE TO PILIPINAS BANK AFTER THE SIGNING OF THIS AGREEMENT AND AS PER SCHEDULE ATTACHMENT 5, THE LOAN AGREEMENT FOR THE PROJECT OF OUR LADY OF GUADALUPE" xxx xxx xxx "ALL ACTIVITIES TO FINALIZE THE PROJECT WILL BE ON THE BASIS OF ATTACHMENT 4 TO 8 WHICH INCLUDES MARKETING AND SALES. THE PROJECT IS CONSIDERED TO BE FINALIZED AND THE JOINT VENTURE AGREEMENT EXPIRES AFTER THE SALE OF ALL UNITS OR PART OF IT AS AGREED TO BY BOTH PARTIES. "2. DISTRIBUTION OF INCOME "The 'DEVELOPER' shall be entitled to 50% of all saleable condominium units and floor space, parking space, communal area and surrounding properties if under the control of the joint venture partners of the project, as well as rentable floor space of 'OUR LADY OF GUADALUPE CONDOMINIUM'. "The 'INVESTOR' shall be entitled to 50% of all saleable condominium units and floor space, parking space, communal area and surrounding properties if under the control of the joint venture partners of the project as well as any rentable floor space of 'OUR LADY OF GUADALUPE CONDOMINIUM'. In reply, please be informed as follows: 1. 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 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. P. D. 929 amended the definition of the taxable corporation as not to include joint venture formed for the purpose of undertaking construction projects. The reasons for such amendment are: (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; (4) To assist them in achieving competitiveness with foreign contractors, the joint ventures formed by them should not be considered an additional income tax lien. 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 is of the opinion as it hereby holds that the Joint Venture entered into by and between Cedar and Swiss American is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The allocation of saleable area of the project between Cedar and Swiss American in consideration of their respective contributions, as stipulated in the Joint Venture Agreement is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. However, upon the subsequent disposition of the co-venturers of the areas allocated to them, the gain may be realized by them from such sale will be subject to the regular income tax rates under 27(A) of the Tax Code of 1997 and to the creditable withholding tax under revenue Regulations No. 2-98. However, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the gross selling price, fair market value or zonal value of the properties, whichever is higher. 3. The Deed of Absolute assignment and Transfer of Rights executed on June 30, 1999 by Cedar assigning, transferring and conveying to Swiss American the latter's share in consideration of its contribution is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, income tax and any withholding tax because the aforesaid allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area between the parties, as the return of the capital which each contributed. Moreover, Section 185 of the Revised Documentary Stamp Tax 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 Absolute Assignment and Transfer of Rights is without consideration and is not in connection with a sale, no income was generated and a fortiori , no creditable withholding tax and documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. prcd This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group