BIR Ruling [DA-165-99]

March 18, 1999 BIR RULING [DA-165-99] R. S. Bernaldo & Associates Unite 1810 Cityland Condominium 10, Tower I 6815 Ayala Ave. cor. H.V. dela Costa Extn. 1200 Makati City Attention: Atty . Rosario S . Bernaldo Managing Partner Gentlemen : This refers to your letter dated October 28, 1998 stating that United Laboratories, Inc. (ULI) [now Castleton Properties and Development Corporation (CPDC)], Jardine Land, Inc. (JLI) and Greenfield Development Corporation (GDC) entered into an agreement for the development of the properties owned by ULI and JLI into a single, unified and integrated residential subdivision project; that as a member of the joint venture, GDC undertook the development of the properties; that under the Agreement, the parties will make the following contribution: LLphil Company Contribution Castleton Properties & Devt. Corp. 29,170 square meters (United Laboratories. Inc.) Jardine Land, Inc. 54,082 square meters Greenfield Devt. Corporation undertake horizontal development of both ULI's and JLI's properties that upon completion of the unified and integrated residential subdivision project, the parties will obtain developed land according to the following properties: Company Share on Developed Land Castleton Properties & Devt. Corp. 24.53% (United Laboratories, Inc.) Jardine Land, Inc. 45.47% Greenfield Devt. Corporation 30.00% 100 % that on June 11, 1998, ULI, with the consent of GDC, sold the two (2) Pasig lots subject matter of the MOA, namely, Lot Nos. 1-B-5 and E covered by TCT Nos. PT-68434 (now TCT No. PT-108756) and T-46365 (now TCT No. PT-108757), respectively, and assigned all its rights, interests and obligations therein to CPDC, and these two (2) Pasig lots with a total area of 29,170 square meters, were transferred in the name of Castleton Properties & Development Corporation. Based on the foregoing facts, you are now requesting on behalf of your clients, ULI (CPDC), for a confirmation of your opinion on the following matters: (1) Taxability of the 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 entity and merely agreed to pool their resources to a common fund, no separate taxable unit is created. In this case, each joint venture partner has to account for his respective share in the net revenue earned from the joint venture project separating from other joint venture partners. Hence, the partners 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. (2) Capital Contribution to the Joint Venture by the Partners 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 also in 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. Your transfer of the lots, the landowners will cease to become specific owners of the land so contributed. At this point, the ownership is stated as a certain portion of the whole without specific identifications of the portions that they will own eventually. Such portion is based on the pre-agreed proportionate ownership between CPDC (ULI), JLI and GDC for the whole project. (3) Distribution of Developed Land The distribution of developed lots/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 the identifiable lot or 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 developed lots to each member 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 back to the joint venture partners is not subject to income tax, expanded withholding tax and VAT. prcd Eventually the taxable event shall rise when the joint venture partners start selling this duly secured developed lots/units to third parties. In reply, please be informed that (1) Taxability of the 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 derive 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 Developed Land The Distribution of the developed lots/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. LLpr Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)