BIR Ruling [DA-140-00]

March 8, 2000 BIR RULING [DA-140-00] 22 (B) DA-165-99 DA-140-2000 Greenfield Development Corporation 2/F Greenfield Building 750 Shaw Boulevard Mandaluyong City Attention: Atty . Frederick A . Vida Corporate Counsel Gentlemen : This refers to your letter dated January 30, 2000 stating that a Development and Marketing Agreement ("Agreement") was entered into by and among Laguna Properties Holdings, Inc. ("LPHI"), Greenfield Development Corporation ("GDC"), Balibago Land Corporation ("BLC") and Maunong Development Corporation ("MDC") on January 13, 1997; that pursuant to said agreement, the parties therein agreed to jointly develop certain parcels of land located at Barangays San Antonio and San Rafael, Sto. Tomas, Batangas with an area of approximately 1,055,636 square meters; that for the development of said parcels of land, LPHI, GDC, BLC and MDC agreed to form an unincorporated joint venture; that the parties shall pool their resources and contribute as follows: As Landowners Company Contribution Laguna Properties Holdings. Inc. 50% undivided interests in parcels of land constituting an area of approximately 1,055,636 square meters* Balibago Land Corporation/ Maunong Development Corporation 50%, undivided interests in parcels of land constituting an area of approximately 1,055,636 square meters* As Developers Laguna Properties Holdings, Inc. 50 % of any and all capital requirements for the development of the parcels of land Greenfield Development Corporation 50% of any and all capital requirements for the development of the parcels of land that from the foregoing contributions, LPHI as lead developer shall construct and develop an integrated residential subdivision aimed at catering to lower-to-middle income families; that the joint venture project shall be developed and be made available to the public in phases that a mixture of developed lots only and developed lots and units shall be constructed and completed for the various phases of the joint venture project; that after development of each phase has been completed, the developed lots and units shall be divided and allocated by the Parties as follows: For the Developers (LPHI and GDC*) 70% of the Salable Lots 90% of the Salable Units *LPHI shall be entitled to 35% of the Salable Lots and 45% of the Salable Units GDC shall likewise be entitled to 35% of the Salable Lots and 45% of the Salable Units For the Landowners (LPHI, BLC and MDC*) 30% of the Salable Lots 10% of the Salable Units that from the foregoing contributions, LPHI as lead developer shall construct and develop an integrated residential subdivision aimed at catering to lower-to-middle income families; that the joint venture project shall be developed and be made available to the public in phases that a mixture of developed lots only and developed lots and units shall be constructed and completed for the various phases of the joint venture project; that after development of each phase has been completed, the developed lots and units shall be divided and allocated by the Parties as follows: For the Developers (LPHI and GDC*) 70% of the Salable Lots 90 of the Salable Units *LPHI shall be entitled to 15% of the Salable Lots and 5% of the Salable Units BLC/MDC shall likewise be entitled to 15% of the Salable Lots and 5% of the Salable Units and that thereafter Salable Lots and Units allocated to the joint venture partners shall be offered for sale to the public with the parties agreeing to utilizing LPHI as the exclusive marketing agent. Based on the foregoing you now request for a confirmation of your opinion that: "(1) NON-TAXABILITY OF THE UNINCORPORATED JOINT VENTURE "Joint venture agreements for construction and development of real property may or may not be treated as a separate taxable unit depending on whether a separate taxable entity is established by the joint venture partners. If the parties did not form a separate taxable entity and merely agreed to pool their resources to a common fund, no separate taxable unit is created. In the instant case, LPHI, GDC, BLC and MDC agreed to pool their resources without forming thereby a separate entity. Thus, the joint venture formed is a non-taxable entity and each joint venture partner has to account for its respective share in the net revenue earned from the joint venture project separate from the other joint venture partners. The parties to the joint venture may file separate income tax returns for its net revenue for the above-mentioned project less their respective proportionate share in the joint venture expenses. "The foregoing conclusion is a re-affirmation of the definition of a "corporation" subject to corporate income tax as provided in section 22(B) of the Tax Code of 1997. Said provision reads: "(B) 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 partnership" 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." "This has been reiterated in a number of BIR Rulings including BIR Ruling No. 165-99 dated March 18, 1999 and BIR Ruling No. 002-97 dated January 14, 1997. cdll "(2) CAPITAL CONTRIBUTION TO THE JOINT VENTURE BY THE PARTIES "The contribution of land to the joint venture project is not a taxable event that will give rise to capital gains tax on sale, assignment, transfer or conveyance of land. Such transfer is similar to a capital contribution which does not give rise to income tax. "The transfer is also not subject to VAT, since the transfer is not in the course of business but a capital contribution. The properties that are being transferred to the joint venture are capital assets. Upon transfer of the parcels of land, the landowners will cease to become specific owners of the parcels so contributed. "In the same vein, the capital contribution of land to the joint venture is not subject to expanded withholding tax. "(3) DISTRIBUTION OF SALABLE LOTS AND UNITS "The distribution of salable lots and units is merely an act of partitioning the commonly owned property. It is nothing more than an act of terminating the co-ownership by making each partner specific owner of an identifiable lot or lot and unit. At this stage, no taxable sum has yet been realized by the joint venture partners, since the process constitutes a single act of returning their contributed capital, that act of allocation or assigning portions of the salable lots/salable lots and units to each members of the joint venture cannot be treated as a taxable event. The same is true despite the fact that the shares allocated to or received by the partners may not necessarily correspond to the lot area originally contributed by them to the joint venture. Hence, the titling of the land in favor of the joint venture partners pursuant to their agreed allocation is not subject to income tax, expanded withholding tax and VAT. "Eventually the taxable event shall rise when the joint venture partners start selling the salable lots/salable lots and units to third parties." (1) NON-TAXABILITY OF THE UNINCORPORATED JOINT VENTURE Section 22(B) of the Tax Code of 1997, provides: "(B) 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 partnership " 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." From the foregoing definition of a corporation, we confirm your opinion that the parties to a joint venture agreement may file separate income tax returns for their net revenue for the above-mentioned project less their respective proportionate share in the joint venture expenses since the joint venture is not embraced within the meaning of the term "corporation", hence, not subject to the corporate income tax imposed under Section 27(A) of the Tax Code of 1997. (BIR Ruling No. 002-97 dated January 14, 1997) (2) CAPITAL CONTRIBUTION TO THE JOINT VENTURE BY THE PARTIES The capital contribution of land by the parties to a joint venture project is not a taxable event that will give rise to the payment of capital gains tax and creditable withholding tax, since contribution of land to the joint venture project is but a capital contribution to the said joint venture project, and therefore, no taxable event has yet taken place. The same is true in the case of VAT since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchange, leases goods or properties, renders services and any person who imports goods shall be subject to the Value-Added Tax (VAT) imposed in Sections 106 to 108 of the Tax Code of 1997. Hence, by contributing land to the joint venture project, the parties thereto neither sells, barters, exchange goods or property nor render services nor import goods to be subject to VAT. Hence, your opinion that the capital contribution of land to the joint venture project by the parties thereto is not subject to capital gains tax, expanded withholding tax and VAT is hereby also confirmed. (BIR Ruling No. 010-96 dated January 23, 1996) The contribution of GDC to the joint venture is the development of the project, therefore, not subject to VAT. (3) DISTRIBUTION OF SALABLE LOTS AND UNITS The distribution of salable lots and units to the joint venture partners does not likewise give rise to a taxable event since the same partakes the nature of a dissolution of co-ownership over real property which is merely identifying that portion of the developed property and which pertains to each of the co-venturers. The eventual transfer of Title in their name is but a mere formality of such dissolution, hence, not a taxable event. The taxable event will rise when the joint venture partners start selling their duly received developed lots/units to third parties. Accordingly, your opinion to this effect is hereby confirmed. (BIR Ruling No. 010-96 dated January 23, 1996) 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)