Empire East Land Holdings, Inc.

March 14, 2007 BIR RULING [DA-157-07] 22 (B); DA-192-2001 Empire East Land Holdings, Inc. 21/F The World Centre 330 Sen. Gil Puyat Avenue Extension Makati City Attention: Atty. Elsie S. Ramos Legal and Corporate Affairs Division Gentlemen : This refers to your letter dated November 9, 2005 requesting for a confirmation of your opinion that: 1. The joint venture between Empire East Land Holdings, Inc. (Empire East) and Byme Investment and Development Corporation (Byme Investment) under the Memorandum of Agreement (MOA) dated November 20, 2002 is not a taxable entity under the Tax Code of 1997; 2. The MOA dated November 20, 2002 is not subject to any tax under the Tax Code other than the documentary stamp tax (DST) imposable on the notarial acknowledgment; 3. No income tax, including capital gains tax, value added tax (VAT) and DST under the 1997 Tax Code is due on the transfer of Transfer Certificates of Title (TCT) Nos. T-205025, T-205026 and T-205027 (the Subject Properties) from Byme Investment to Empire East pursuant to the terms of the joint venture under the MOA and the Addendum; and 4. No income tax, including capital gains tax, VAT and DST under the Tax Code of 1997 is due on the issuance of the TCTs in the name of Empire East resulting from the consolidation and subdivision of the Subject Properties in accordance of the terms and conditions of the joint venture under the MOA. IcSEAH It is represented that Byme Investment is a domestic corporation organized under and by virtue of Philippine laws. It is the registered owner of three (3) parcels of contiguous land containing a total area of 245,621 square meters, more or less, and covered by TCT Nos. T-205025, T-205026 and T-205027 located in Brgy. Don Jose, Sta. Rosa, Province of Laguna. On November 20, 2002, Byme Investment and Empire East entered into a joint venture agreement for the development of a subdivision adjacent to the already existing Laguna Bel Air Subdivision and which will be named Laguna Bel Air 4. Under the MOA, Byme Investment shall contribute the Subject Properties to the joint venture, and Empire East shall be responsible for the planning, construction, monitoring, supervision, development and marketing of Laguna Bel Air 4. Accordingly, Empire East was constituted and appointed by Byme Investment as its attorney-in-fact, with "...the powers and rights to do or perform for and on [its] behalf ...any act related or incidental to the development of the Project, promotion and sale of the units therein, application for any and all governmental permits related to the construction development, alteration of the property/building/plans and specification, which would allow [Empire East] to perform its obligations to [Byme Investment] and/or third party buyers and/or governmental agencies under this Agreement, including, but not limited to, the preparation of the Deed of Restriction of the Project, as well as the application for the issuance of the individual transfer certificates of title for the individual lots of the Project." Under the joint venture agreement as embodied in the MOA, Byme is authorized to transfer to Empire East the Subject Properties for purposes of consolidating vis--vis subdividing the Subject Properties for its eventual transfer to the name of the subdivision lot buyers. The pertinent portion of the MOA reads: "For this purpose, [Empire East] may, without objection from [Byme Investment],use this Agreement to transfer into [Empire East's] name the transfer certificates of titles ( sic ) over the Subject Properties, cause the issuance of the titles over the individual lots of the Project, for the eventual transfer to the name of [Empire East's] buyers." CAaSHI The transfer of the Subject Properties from Byme Investment to the Empire East pursuant to the MOA is subject to a Deed of Trust and Undertaking dated November 20, 2002. In consideration of their mutual obligations under the joint venture, Byme Investment and Empire East agreed to share in the proceeds of the sale of the subdivision lots in the Project. In reply, please be informed that pursuant to Section 22 (B) of the Tax Code of 1997, 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. 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; (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 Byme Investment and Empire East is not subject to income tax under Section 27 of the Tax Code of 1997. The conveyance of the Subject Properties from Byme Investment to Empire East and the issuance of the TCTs in the latter's name resulting from the consolidation and subdivision of the such landholdings pursuant to the terms of the joint venture under the MOA and by virtue of a Deed of Trust and Undertaking is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax/capital gains tax and DST. The transfer is likewise not subject to VAT, since the transfer is not in the course of trade or business but a capital contribution. (BIR Ruling No. DA-155-2001 dated September 5, 2001) TSHEIc The Sharing Agreement whereby Byme Investment and Empire East will allocate unto each other their share in the proceeds of the sale of the 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, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the share of the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Sharing Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (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, Byme, neither sells, barters, exchanges goods, properties nor render 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 Tax Code of 1997, 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. ICTHDE 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