BIR Ruling [DA-124-97]

March 21, 1997 BIR RULING [DA-124-97] Filinvest Land Incorporated 173 P. Gomez Street San Juan, Metro Manila Attention: Atty. Juan Orendain P. Buted Corporate Counsel Gentlemen : This refers to your letter dated March 14, 1997, requesting in effect for a ruling on the tax implications of a "Development Agreement" which Filinvest Land Incorporated (FLI) entered into with First Optima Realty Corporation (Optima) for the horizontal development of its properties for a subdivision. It is represented that on September 21, 1996, FLI entered into a Development Agreement with Optima for the horizontal development of the latter's properties in Taytay, Rizal, with an aggregate area of 453,758 square meters, more or less; that the salient features of the Development Agreement are as follows: "a. FLI shall undertake the horizontal development of the properties for a subdivision. All expenses for the development, including equipment, construction materials, supply, and labor, and all other expenses necessary or incidental to the development of the Property such as preparation of plans and specifications for the proposed subdivision and implementation of the development works shall be for FLI's account. "b. FLI shall receive Sixty Percent (60%) of the salable lots for and in consideration of the development obligations and undertakings under the agreement. Optima shall retain the remaining Forty Percent (40%). CaEIST "c. After the proper government agency would have approved the subdivision plan over the Property, the Parties shall allocate the salable subdivision lots in accordance with the said sharing. "d. The Parties shall execute a Deed of Partition over the Property which shall serve as basis for the registration of the Parties' respective lots corresponding to their allocation. "e. Since the Parties will each own their respective share or in the salable lots in the Project, each party shall be free to sell or otherwise dispose of its respective lots. Optima may authorize FLI to handle marketing and sales services relative to the sale of its lots in consideration for the fees stated in the agreement. The services include the * of FLI's duly accredited sales agents/brokers, who shall negotiate, document and prepare contracts relative to the sales of the said lots, remittance of all payments pertaining to the real property owner/s, and extension of legal services which may be necessary relative to the management of the Project and the extrajudicial collection of contract receivables arising from the sale of the real property owner/s share in the sale of its lots allocation." that on September 27, 1996, the parties executed a Partition Agreement under which they adjudicated unto themselves certain portions of the Property in accordance with the 60% 40% sharing ratio mentioned in the Development Agreement; and that the Partition Agreement furthermore provided that the same shall serve as authority for the Register of Deeds for the Province of Rizal to issue the respective certificates of title corresponding to the allocation of the parties. 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 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. Thus, it is our opinion that the joint venture of FLI and Optima is not subject to the corporate income tax under Section 24 of the Tax Code, as amended. 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. Considering the foregoing, your opinion that the Development Agreement executed by FLI and Optima for the development of the properties for a subdivision and the allocation of their respective participating interests in the project will not create a 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 developed lots as their participating interest in the project, as stipulated in the Development Agreement and Partition Agreement, is not a taxable event and is not subject to income/expanded withholding tax, is hereby confirmed. However, when the parties subsequently sell or dispose of the developed lots which they received or will receive (as in the case of pre-selling) as their respective shares or participating interests in the project to third parties, the gain that may be realized by FLI and/or Optima from such sale will be subject to the regular 35% corporate income tax under Section 24 of the Tax Code, as amended, or to the tax imposed under Section 21 (f) in the case of individual owners and to the creditable/expanded withholding tax under Revenue Regulations No. 6-85, 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 be considered null and void. (BIR Ruling No. 010-96 dated January 23, 1996) AScTaD Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: (SGD.) ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)