BIR Ruling [DA-135-00]

March 6, 2000 BIR RULING [DA-135-00] 22 (B); 27; 57 (B); 188 DA-113, 311 & 646-99 DA-135-2000 Castillo Laman Tan Pantaleon & San Jose Law Offices The Valero Tower, 122 Valero St. Salcedo Village, Makati City Attention: Atty . Noel A . Laman and Atty . J . GregsonA . Castillo Gentlemen : This refers to your letter dated January 7, 2000 requesting in behalf of your client, Unicorn First Properties, Inc. ("Unicorn") , for the issuance of a certification that the Joint Venture Agreement ("Amended Investment Agreement") executed by Unicorn and Equitable Banking Corporation (for and in behalf of the Trust Accounts enumerated in the said amended agreement), DMCI Project Developers, Inc., Frigate Holdings and Management Corporation, DMC-Urban Property Developers, Inc., Bill Paul Tin Future Holdings, Inc., IDS Holdings Company, Inc. and Green Circle Properties and Resources, Inc. is not a taxable event and is not subject to capital gains, income, expanded withholding and documentary stamp taxes. cdll It is represented that Unicorn is the registered owner of a parcel of land (the "Property") situated along Paseo de Roxas, Makati City, and covered by Transfer Certificate of Title No. 188290 issued by the Registry of Deeds of Makati City; that on December 14, 1995, it entered into an Investment Agreement with Equitable Banking Corporation, Frigate Holdings and Management Corporation, DMC-Urban Property Developers, Inc., Bountiful Realty & Development Corporation, IDS Holdings Company, Inc. and Peaksun Enterprises & Export Corporation, whereby Unicorn contributed the land, its development expertise and resources, and the other investors contributed cash to defray construction expenses, for the purpose of developing the Property into an office condominium (the "Project"); that on October 27, 1998, the aforesaid agreement was amended and superseded by an Amended Investment Agreement entered into by, and between and among Unicorn, Equitable Banking Corporation (for and in behalf of the Trust Accounts enumerated in the said amended agreement), DMCI Project Developers, Inc., Frigate Holdings and Management Corporation, DMC-Urban Property Developers, Inc., Bill Paul Tin Future Holdings, Inc., IDS Holdings Company, Inc. and Green Circle Properties and Resources, Inc.; that the Amended Investment Agreement provides for the following terms and conditions: "1. Unicorn will contribute the Property, its development expertise and resources, and the other investors, consisting of Equitable Banking Corporation (for and in behalf of the Trust Accounts enumerated in the said amended agreement), DMCI Project Developers, Inc., Frigate Holdings and Management Corporation, DMC-Urban Property Developers, Inc., Bill Paul Tin Future Holdings, Inc., IDS Holdings Company, Inc. and Green Circle Properties and Resources, Inc. will contribute cash to defray construction expenses, for the purpose of developing the Property into an office condominium. "2. Upon completion of the Project, and in return for their respective contributions, each party to the amended investment agreement will acquire and be allocated a specific number of floor space/office units and parking spaces in the Project. In implementing the allocation, condominium certificates of title will be issued to each party covering the office units and parking spaces allocated to it in return for their contribution to the Project. "3. Unicorn, Equitable Banking Corporation (for and in behalf of the Trust Accounts enumerated in the said amended agreement), DMCI Project Developers, Inc., Frigate Holdings and Management Corporation, DMC-Urban Property Developers, Inc., Bill Paul Tin Future Holdings, Inc., IDS Holdings Company, Inc. and Green Circle Properties and Resources, Inc. will form a condominium corporation that will hold title to, manage and maintain the land and the common areas pursuant to the provisions of Republic Act No. 4726, as amended, known as the Condominium Law. 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 said corporation." LexLib In view of the foregoing, you now request confirmation of your opinion that: "1. The Amended Investment Agreement and the allocation of salable units and parking spaces pursuant thereto will not give rise to a separate taxable joint venture within the meaning of Section 22(b) of the Tax Code. "2. The allocation, pursuant to the amended Investment Agreement, of the salable units and parking spaces among the parties thereto, in consideration of their respective contributions is not a taxable event, and is thus, not subject to income/withholding tax, the allocation being a mere return of the capital that each has contributed to the project. The allocation is also not subject to DST considering that the same is not made in connection with a sale. LibLex "3. The Deed of Conveyance in favor of the condominium corporation without monetary consideration and merely to comply with the Condominium Law is not subject to income tax, withholding tax or DST." 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 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. It is to be emphasized, however, that P.D. No. 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 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 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 Amended Investment Agreement entered into by and among Unicorn, Equitable Banking Corporation (for and in behalf of the Trust Accounts enumerated in the said amended agreement), DMCI Project Developers, Inc., Frigate Holdings and Management Corporation, DMC-Urban Property Developers, Inc., Bill Paul Tin Future Holdings, Inc., IDS Holdings Company, Inc. and Green Circle Properties and Resources, Inc. is not subject to the regular income tax under Section 27(A) of the Tax Code of 1997. (BIR Ruling No. DA-113-99 dated February 25, 1999) 2. The allocation of salable lots between and among Unicorn, Equitable Banking Corporation (for and in behalf of the Trust Accounts enumerated in the said amended agreement), DMCI Project Developers, Inc., Frigate Holdings and Management Corporation, DMC-Urban Property Developers, Inc., Bil Paul Tin Future Holdings, Inc., IDS Holdings Company, Inc. and Green Circle Properties and Resources, Inc. in consideration of their respective contributions, 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 by the co-venturers of the lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax under Section 27(A) of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, as further amended by Revenue Regulations No. 2-98. The Partition Agreement whereby Unicorn, Equitable Banking Corporation (for and in behalf of the Trust Accounts enumerated in the said amended agreement), DMCI Project Developers, Inc., Frigate Holdings and Management Corporation, DMC-Urban Property Developers, Inc., Bil Paul Tin Future Holdings, Inc., IDS Holdings Company, Inc. and Green Circle Properties and Resources, Inc. will allocate unto each other their share in the salable lots in consideration of their respective contributions, 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 allocation is made without monetary consideration and is not in connection with a sale, instead, the partition is made merely to segregate the salable lots between the parties, as the return of the capital which each contributed. (BIR Ruling No. DA 113-99 dated February 23, 1999) cdlex 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 Partition Agreement is without consideration and is not in connection with a sale made to third parties, no income was generated and a fortiori, no creditable withholding tax and documentary stamp tax are payable and collectible. However, the acknowledgment to said Partition Agreement is subject to the documentary 3. Since the Deed of Conveyance in favor of the condominium corporation is without monetary consideration and is not in connection with a sale made to the condominium corporation, no taxable income will be generated and a fortiori, no creditable withholding tax is payable or collectible. The purpose of the conveyance to the condominium corporation is precisely to comply with the Condominium Law. In view thereof, this Office is of the opinion as it hereby holds that the aforesaid Deed of Assignment is not subject to the creditable withholding tax under 57(B) in relation to Section 27 of the Tax Code of 1997. Neither is it subject to the documentary stamp tax imposed under Section 196 of the same Code. However, the notarial acknowledgment to said deed of assignment is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. 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." (BIR Ruling No. DA-646-99 dated November 22, 1999) 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)