BIR Ruling [DA-171-03]

May 30, 2003 BIR RULING [DA-171-03] 22 (B), 27, 196 DA-083-99 Atty. Jessie S. Vargas, CPA c/o Handumanan Development Corporation Arcenas Building, Osmea Boulevard Cebu City S i r : This refers to your letter dated December 7, 2001, the contents of which is quoted as follows: "We would like to request for a ruling on the tax implication of the Joint-Venture Agreement entered into by my client Handumanan Development Corporation and its wholly owned subsidiary, Arcenas Development Corporation, referred herein as the DEVELOPER, with Teodoro Diez, Teresita Catane, Edwin Cabato, Alvin Joseph Lim and Marilou Arcenas hereafter collectively referred to as the LANDOWNERS, who, to their own right, each own several parcels of land duly registered with the Registered of Deeds of Cebu City, Cebu, referred to as "PROPERTIES" in the said agreement. Taken together, the properties would total ninety thousand two hundred seventy two (90,272 sq.m.) square meters, more or less. The LANDOWNERS of the property have entered into a Joint Venture Agreement for the development and construction of a subdivision project and the Joint Venture Agreement essentially stipulated the following provisions: 1. That the LANDOWNER shall contribute and pool together their respective PROPERTIES to form part of the entire area of the development project; 2. As its contribution to the PROJECT, the DEVELOPER will perform the development and construction work for the entire PROJECT at its own expense. It will therefore provide the cash for the development and construction of the PROJECT to be done in phases. That the developer shall also prepare the consolidation-subdivision plans, engineering designs and other plans in accordance with the standard rules and regulations prescribed by the HLURB and other government agencies, which regulate construction and development of residential subdivision; AECacT 3. In consideration of, and in return for, the respective contribution of the LANDOWNERS and the DEVELOPER, the parties to the contract are allocated a certain area of all the component portions of the entire PROJECT consisting of sellable lots and their respective share of the roads and open spaces as follows: Table of Land Areas Assigned 4. Each LANDOWNER will each own their respective share in the completed and developed phases of the PROJECT and are free to sell their respective share in the PROJECT in accordance with the Joint Venture Agreement. 5. The LANDOWNER is guaranteed a minimum of FORTY THOUSAND SIX HUNDRED TWENTY THREE (40,623) square meters (referred to as the "guaranteed share") as their share in the development which share shall include of the SUBDIVISION ROADS and open spaces, the actual size of which shall be determined in accordance with the MASTER PLAN OF DEVELOPMENT of every phase. This share shall be distributed among them in accordance with the above schedule. This share of the LANDOWNER shall be the total land area determined as follows: i. The sum total of the land area covered by the sellable lots chosen in each phase of the development by the LANDOWNER; ii. The LANDOWNER'S share of the SUBDIVISION ROADS and open spaces as determined in accordance with every phase's MASTER PLAN DEVELOPMENT which shall be approximately forty five percent (45%) of the land area of the SUBDIVISION ROAD's and open spaces. 6. The share of the DEVELOPER shall be the total land area determined as follows: i. The sum total of the land area covered by the sellable lots chosen by the DEVELOPER in each phase of the development, ii. The DEVELOPER'S share of the SUBDIVISION ROADS and open spaces shall be no more than fifty five percent (55%) of the land of the said SUBDIVISION ROAD's and open spaces; iii. The total land area covered by the ACCESS ROADS leading to the subdivision; and iv. The whole length and area of the creek. The DEVELOPER shall have the option to have the title of the creek transferred in its name or to retain the title under the name of the LANDOWNER with the perpetual usufructuary rights belonging to the DEVELOPER. 7. That immediately upon the signing of the agreement, a Deed of Assignment shall be executed by the LANDOWNER assigning FORTY NINE THOUSAND SIX HUNDRED FORTY NINE (49,649) square meters of the total undeveloped land area in accordance with the schedule provided above in favor of the DEVELOPER." and that in support of your request, you submitted to this Office the following documents, viz. : 1. Memorandum of Agreement; 2. Deeds of Assignment; 3. Transfer Certificates of Title; and 4. Tax Declarations. In reply, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, 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 or 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. In view thereof, it is our opinion that the joint venture of Handumanan Development Corporation, as developer, and Teodoro Diez, Teresita Catane, Edwin Cabato, Alvin Joseph Lim and Marilou Arcenas, as landowners, for the development of the aforementioned land into a commercial or residential subdivision is not subject to the corporate income tax under Section 27 of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate/income tax on their taxable income during each taxable year respectively derived by them from the sale of their respective shares in the condominium. Considering the foregoing, the Memorandum of Agreement executed by Handumanan Development Corporation and Teodoro Diez, Teresita Catane, Edwin Cabato, Alvin Joseph Lim and Marilou Arcenas for the development of the aforementioned land into a commercial or residential subdivision, and the allocation of certain area of all the component portions of the entire project consisting of sellable lots and their respective share of the roads and open spaces 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 Tax Code of 1997, and that the allocation between Handumanan Development Corporation and Teodoro Diez, Teresita Catane, Edwin Cabato, Alvin Joseph Lim and Marilou Arcenas of certain area of all the component portions of the entire project in consideration of their contribution in the project, as stipulated in the Memorandum of Agreement, is not taxable event and is not subject to income/withholding tax because the allocation is a mere return of the capital that each has contributed to the Project. However, should Handumanan Development Corporation and Teodoro Diez, Teresita Catane, Edwin Cabato, Alvin Joseph Lim and Marilou Arcenas sell any portion of the property allocated to them to third parties, the gain that may be realized by them from such sale effective January 1, 2000 will be subject to the regular income tax under the Tax Code of 1997, and to the creditable/expanded withholding tax (EWT) under Revenue Regulations No. 2-98, as amended (BIR Ruling No. 274-92 dated September 30, 1992; BIR Ruling No. UN-025-95 dated January 11, 1995; and BIR Ruling No. DA-488-98 dated November 16, 1998) , and necessarily, the said transaction shall be subject to the documentary stamp tax imposed under Section 196 of the same Code. This ruling is being issued based on 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. ( BIR Ruling No. 207-92 dated July 16, 1992; BIR Ruling No. 317-92 dated October 28, 1992 ). ASHaDT Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service