Integral Realty Corporation

February 16, 2007 BIR RULING [DA-103-07] 22 (B); DA-056-03 Integral Realty Corporation Cortijos Greenhills Condominium 25 Eisenhower Street, San Juan Metro Manila Attention: Mr. Rolando V. Tongco President Gentlemen : This refers to your letter dated November 13, 2006 stating that Integral Realty Corporation (Integral) owns a parcel of land with an aggregate area of 3,286 square meters, more or less, identified as Lot 1, Pcs-4217 Don Mancio Blvd., Alabang, Muntinlupa City covered by TCT No. 202701 issued by the Registry of Deeds for Makati (Subject Land); that Integral plans to develop it into a residential townhouse condominium project known as "RESIDENCIA ALABANG" (Project) in accordance with the provisions of Republic Act (R.A.) No. 4726, otherwise known as the Condominium Act, as amended; that Integral will engage the services of a Project Manager to gather a sufficient number of investors (Clients) and to manage and administer the development of the Project; that Integral and the Project Manager will execute a Memorandum of Agreement (Agreement) which will grant the latter the right and option to require the former to participate as an investor in the Project by contributing the Subject Land and in return will acquire and be allocated a specific number of Units in the Project; that the Agreement may be exercised by the Project Manager at anytime within twelve (12) months from the issuance of a favorable ruling from the BIR; that upon the exercise of the option by the Project Manager, which will take place when it has gathered a sufficient number of investors, Integral will contribute the Subject Land to the Project; that to begin the Project, each Client will enter into a Contract to Manage and Execute the Construction of RESIDENCIA ALABANG (Contract); that in the said Contract, each Client will undertake to collectively develop the Project and to put up its respective construction funding contributions for the same; that in return for such participation and as part of its interest in the Project, each Client will be assigned specific condominium units in the Project (Condominium Units); that in addition, each Client will have a proportionate undivided interest in the common areas of the Project, which common areas include the Subject Land (the Common Areas); that under the terms of the Contract, each Client will agree that prior to the actual division of the Project into individual units, their respective interests in the Project would consist of a pro-indiviso, pro-rata share, held collectively with the other Clients; that realizing, however, that it would be cumbersome and administratively difficult for all the Clients to be named as owners of the Subject Land and the Project, various trust agreements will be executed by the Clients, as Trustors, and Trustee Bank, for the purpose of allowing the Trustee to hold title to the Subject Land and the Project; that at the time of the execution of the Trust Agreements by the Trustors, their respective construction funding payments will be remitted to the Trustee as and when necessary with the instructions for the Trustee to hold and disburse the funds for the development of the Project; that as part of its functions, the Trustee shall cooperate with the Project Manager, in the course of the Project's development, particularly in effecting the condominiumization of the Project and obtaining necessary registrations for the same and the individual Condominium Units and Common Areas; and that finally, under the terms of the Trust Agreement, upon completion of the Project, the Trustee is to execute Deeds conveying in favor of the Clients their respective Condominium Units and the Common Areas in favor of a Condominium Corporation. Based on the foregoing representations, you now request confirmation of your opinion that 1. The Contract to Manage and Execute the Construction of Residencia Alabang and the MOA entered into by the Individual Investors, Integral and the Project Manager, being one formed for the purpose of undertaking a construction project pursuant to Section 22 (B) of the Tax Code of 1997, is tax exempt. 2. The conveyance of a parcel of land from Integral to a Trustee as its capital contribution and the allocation of the residential condominium units and common areas to Integral and other clients/investors are not subject to VAT imposed under Section 106 of the Tax Code, as amended and to the corresponding documentary stamp. 3. The conveyance of the Condominium Units by the Trustee to the individual Trustors is not subject to any tax imposed under the Tax Code and the corresponding documentary stamp tax on the deeds of sale and conveyances of real property imposed under Section 196 of the said Code. 4. The conveyance of the land and common areas of the Project by the Trustee to the Condominium Corporation is not subject to tax. 5. The assignment of rights by investors/clients is not subject to capital gains tax, creditable withholding tax, VAT and the corresponding documentary stamp taxes. aHTCIc In reply thereto, please be informed that your opinion is hereby confirmed as follows: (1) Section 22 (B) of the Tax Code of 1997, as amended, provides that "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 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. General professional partnerships are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." (emphasis supplied) It is to be emphasized, however, that P.D. 929 amended the definition of the taxable corporation so 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. In stressing the rationale of the above-mentioned rule, this Office elucidated the matter in BIR Ruling No. DA247-01 dated November 27, 2001, as follows: "The MOA executed among Philrealty, Comunidades and each of the Investors described above is an agreement among the parties to construct and fund the cost of construction of a residential condominium project which is neither a contract of sale over real property nor an instrument which conveys title to real property. Hence, no income tax or documentary stamp tax (DST) is due upon the execution of the MOA (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the MOA is subject to the DST on certification pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA015-99 dated January 11, 1999) " Applying the foregoing precept, this Office hereby confirms your opinion that the Contract to Manage and Execute the Construction of Residencia Alabang and MOA to be entered into by the Individual Investors and Integral with the Project Manager, is not subject to income tax as separate corporation as it is not a taxable joint venture pursuant to Section 22 (B) of the Tax Code of 1997. However, the notarial acknowledgments on the aforesaid Contract and MOA are subject to the documentary stamp tax on certification pursuant to Section 188 of the said Code, as amended. (2) In BIR Ruling No. DA140-2000 dated March 8, 2000 , this Office opined that "The contribution of land by Philrealty to the Project is likewise not subject to the 10% VAT because the transfer is not made in the course of business but only a capital contribution and that the same property being transferred to the Project is a capital asset." Accordingly, the contribution of the Subject Land by Integral to the Project is not subject to VAT because the transfer is not made in the course of business but only a capital contribution and that the same property being transferred is a capital asset. Moreover, the allocation and distribution of the completed condominium units and the issuance of the corresponding Condominium Certificates of Title by the Registry of Deeds of Muntinlupa to the co-venturers in accordance with their respective equity contributions as stipulated in the Contract and MOA is not subject to income tax and consequently to withholding tax and VAT, considering that the same is not in connection with a sale, but merely a transaction to effect the return of their respective capital contribution to the joint venture. ( BIR Ruling No. 324-00 dated August 25, 2000 ) ASIDTa However, upon subsequent disposition by the parties under the aforesaid Contract and MOA of the units allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax provided under the pertinent provisions of the Tax Code of 1997 and to the expanded withholding tax under Revenue Regulations No. 6-2001, as amended. 3. The conveyance of the Condominium Units and Parking Units by the Trustee to the individual Trustors does not have the effect of a sale, exchange or disposition, nor does it vest title on the real properties as the individual Trustors retain beneficial ownership over the aforesaid property that would give rise to a taxable event. Moreover, the transfer is without monetary consideration and the trustee merely holds legal title to the Condominium Units. Accordingly, the conveyance of the Condominium Units is not subject to the 1.5% documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, but only to the documentary stamp tax of P15.00 provided in Section 188, supra . ( BIR Ruling Nos. DA056-03 dated February 24, 2003 ) 4. The conveyance of the land and common areas of the Project by the Trustee in favor of the Condominium Corporation being without monetary consideration and not in connection with a sale made to the condominium corporation, no income was generated and a fortiori , no income and/or creditable withholding tax is payable and collectible. Since the said conveyance is not a sale, it is likewise not subject to the VAT imposed under Section 106 of the Tax Code of 1997, as amended by R.A. No. 9337, neither will it be subject to the documentary stamp tax on sale or conveyance of real property imposed under Section 196, supra . However, the notarial acknowledgment to said deed of conveyance is subject to documentary stamp tax of P15.00 pursuant to Section 188, supra . (BIR Ruling Nos. DA040-01 dated March 20, 2001; DA056-03 dated February 24, 2003) CASTDI 5. The assignment of rights over the Contract by the individual investors is not a sale, exchange or disposition of real property but an assignment of right pertaining to such property, hence, not included within the contemplation of Section 24 (D) (1) and Section 77 (D) (5) of the Tax Code of 1997, as amended. This is so because, considering that in a sale of right, the buyer merely steps into the shoes of the seller without acquiring a better right than what the seller had in the property to which the sold right pertains. However, any gain realized by the seller from and as a consequence of such sale is subject to income tax. Accordingly, the sale of rights over the Contract is not subject to capital gains tax and to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended. ( BIR Ruling No. DA096-06 dated March 6, 2006 ) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service