DMCI Homes, Inc.

March 4, 2008 BIR RULING [DA-126-08] 22 (B); DA-192-2001 DMCI Homes, Inc. 4th Fl. DACON Bldg. 2281 Don Chino Roces Avenue Makati City Attention: Atty. Roel A. Pacio Gentlemen : This refers to your letter dated November 22, 2007 requesting on behalf of DMCI-Project Developers, Inc. (hereinafter, DMCI-PDI) for a confirmation on the tax consequences of its joint venture agreement with Riviera Land Corporation (RLC). It is represented that DMCI-PDI is a domestic corporation engaged in the business of acquiring, developing and selling real estate, including residential subdivisions. On the other hand, RLC is the absolute and registered owner in fee simple of fifty (50) parcels of land located in Barangay Matandang Balara, Capitol, Quezon City with an aggregate area of 8,975.76 square meters covered by TCT Nos. N-242371 to N-242384, N-242403, N-249728, N-249729, N-242392 to N-242394, N-242404 to N-242410, N-242415 to N-242431, N-242433 to N-242435 and N-242437 to N-242439 issued by the Registry of Deeds for Quezon City. On April 26, 2002, RLC and DMCI-PDI entered into a Memorandum of Agreement (MOA) for the construction and development of a condominium project in the said 50 parcels of land. The condominium project is to be known as "The Manors at The Celebrity Place" (hereinafter, the "Project"). Pursuant to the MOA, the aforesaid parties contracted, among others: a) RLC will contribute the parcels of land as the site of the Project. On the other hand, DMCI-PDI will contribute the necessary cash to defray construction expenses and the skills necessary for the development and construction of the Project; ESAHca b) In consideration of and in return for their respective contributions to the Project, DMCI-PDI will receive 70% of the saleable units, while the remaining 30% will be retained by RLC. In implementing the allocation, condominium certificates of title will be issued to each party covering the saleable units and parking slots allocated to each of them in return for their contribution to the Project; c) The project will be constituted into a condominium project under the Condominium Act, and a condominium corporation will be formed to hold title to, manage and maintain the land and designated common areas in the Project. For this purpose, the aforesaid parties will transfer the land and the common areas to the condominium corporation, without any monetary consideration by executing a Deed of Conveyance in favor of the condominium corporation. Based on the foregoing, you now request for confirmation that: 1. The MOA executed between DMCI-PDI and RLC for the construction and development of the Project, and the allocation of specific floors or units therein, as well as parking slots in the Project will not give rise to a separate taxable joint venture within the meaning of Section 22 (B), in relation to Section 27 (A) of the 1997 Tax Code; 2. The allocation between DMCI-PDI and RLC of the floors or units in the Project in consideration of their contribution in the Project, as stipulated in the MOA is not a taxable event and thus, is not subject to income/withholding tax, because the allocation is a mere return of the capital that each has contributed to the Project; 3. The deed of partition that will be executed by the parties whereby DMCI-PDI and RLC will allocate between themselves their respective shares such that the condominium certificates of title will be issued directly to the respective party is also not subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997, because the allocation is made without monetary consideration and is not in connection with a sale (Section 185, Regulations No. 26, Revised Documentary Stamp Tax Regulations). The partition is made merely to segregate the saleable units between the parties, as the return of the capital which each contributed to the Project; and HDIaST 4. The deed of conveyance to be executed by RLC to convey the land and designated common areas without monetary consideration to the condominium corporation formed pursuant to the Condominium Act will not be subject to income tax/expanded withholding tax and documentary stamp tax pursuant to Section 196 of the same Tax Code. In reply, please be informed as follows: 1. Pursuant to Section 22 (B) of the Tax Code of 1997, the term "corporation" 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. P.D. No. 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; and (4) To assist them in achieving competitiveness with foreign contractors, the joint ventures formed by them should not be considered as additional income tax lien. Considering therefore, 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 hereby opines that the joint venture by and between RLC and DMCI-PDI is not subject to income tax under Section 27 of the Tax Code of 1997, as amended. EcHIAC 2. The allocation between RLC and DMCI-PDI of their corresponding shares of the floors or units in the Project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the allocation is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) 3. The Deed of Partition that will be executed by RLC and DMCI-PDI whereby they will allocate unto each other their shares, in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Deed of Partition is subject to the documentary stamp tax pursuant to Section 188 of the same Tax Code, as amended. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing its parcels of land, RLC, neither sells, barters, exchanges goods, properties nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) It is understood however, that upon the subsequent disposition by the co-venturers of the areas allocated to them, the gain that may be realized by them from such sale will be subject to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 27 (D) (5), as the case may be. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code, as amended, based on the gross selling price or fair market value of the property, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. TSacCH 4. The conveyance of the land and designated common areas in the Project without monetary consideration to the condominium corporation will not be subject to capital gains tax/expanded withholding tax, nor to the documentary stamp tax on transfer of real property imposed under Section 196 of the same Code, as amended. The aforestated transfer being made merely in compliance with the requirements of the Condominium Act, purposely for the management of the Project for the common benefit of the unit owners. However, it is subject to documentary stamp tax on certificates in the amount of Fifteen Pesos (P15.00) imposed under Section 188 of the Tax Code of 1997, as amended. This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Certificate Authorizing Registration/Tax Clearance Certificate with regard to the transfer of the condominium units in the Project to the co-venturers based on their respective allocations without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service