Attys. Jose C. Leynes & Ma. Lourdes L. Guillergan

February 16, 2007 BIR RULING [DA-100-07] Attys. Jose C. Leynes & Ma. Lourdes L. Guillergan 703-A Vicente Madrigal Building 6793 Ayala Avenue Makati City Gentlemen : This refers to your letter dated January 23, 2007 stating that on April 25, 2006, your client, Palm Beach Realty and Development Corporation (Palm Beach) with office address at Unit 1, 3rd Floor, RB Arcade Building, Don Jesus Boulevard corner West Service Road, Alabang, Muntinlupa City, and Accupak Philippines Realty and Development Corporation (Accupak) with office address at Barangay Majada, Calamba City, Laguna, entered into a Joint Venture Agreement (JVA) involving two (2) parcels of land owned by Accupak located at Barangay Majada, Calamba City, Laguna, with an aggregate area of 41,950 square meters covered by TCT Nos. T-412332 and T-412333; that pursuant to the said JVA, Accupak will contribute the above-mentioned properties into the joint venture which Palm Beach will develop into a low-cost housing subdivision project under B.P. No. 220; that as developer, Palm Beach will be responsible for all expenses necessary and incidental to the development and subdivision of the properties into individual lots; that in consideration of their contributions to the joint venture, the parties agree to share equally in the saleable lots; that 50% share of each party in the saleable lots will be covered by individual titles registered under their respective names; and that the titles to all road lots, open spaces and other non-saleable areas will be registered under the name of Palm Beach. In connection therewith, you now request for confirmation of your opinion that 1. The aforesaid JVA is not a separate taxable entity; and 2. The allocation of saleable lots is not subject to any internal revenue tax. In reply thereto, 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 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. HCEaDI It is to be emphasized, however, that 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 JVA entered into by Palm Beach and Accupak is not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997. 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 project. 2. The allocation and distribution of the saleable lots to Palm Beach and Accupak 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. Moreover, in the event that Palm Beach, as developer, decides to transfer the title to the property representing its share in the saleable lots under its name, such transfer is still not subject to the aforementioned taxes. 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. ATaDHC Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service