BIR Ruling [DA-177-04]

April 6, 2004 BIR RULING [DA-177-04] 22 (B) DA-067-2002 Moldex Realty Inc. Moldex Bldg., Ligaya St., Corner West Avenue, Quezon City Attention: Mr. Maurito C. Tarobal AVP-Finance Gentlemen : This refers to your letter dated April 1, 2004 requesting for confirmation of your opinion that: 1. The Memorandum of Agreement ("MOA"), copy of which will be annotated on the back of the title to the PROPERTY, executed by Moldex Realty, Inc. (hereinafter referred to as the "DEVELOPER") and AFR Retirement and Separation Benefits System (hereinafter referred to as the "OWNER"), does not give rise to a taxable joint venture within the meaning of Section 22(B) of the Tax Code, as amended. The MOA is subject only to the documentary stamp tax of P15.00 imposed on the notarial acknowledgment of the MOA under Section 188 of the Tax Code, as amended. 2. The allocation of the residential and commercial lots out of the RESIDENTIAL and COMMERCIAL PROJECTS to the DEVELOPER commensurate to and in consideration of its respective contribution by way of the development of the PROPERTY referred to in the MOA, is not a taxable event, and thus, not subject to income/expanded withholding tax and/or capital gains tax, the allocation being a mere return of the capital that each has contributed to the PROJECT. 3. The contribution of the OWNER to the PROJECT in the form of real property and the allocation of the subdivided lots among the DEVELOPER and the OWNER in exchange for their respective contributions to the PROJECT, are not subject to the capital gains tax imposed under Section 24(D) of the Tax Code, as amended, but only to the documentary stamp tax of P15.00 imposed on the notarial acknowledgment under Section 188 of the same Code. The facts as represented, are as follows: 1. The OWNER is the legitimate and registered owner of several parcels of land, collectively referred to herein as the "PROPERTY", situated in Barangay Balibago, Sta. Rosa, Laguna, containing an aggregate area of Five Hundred Twenty-Four Thousand Four Hundred Seven (524,407) square meters, more or less, which parcel of land are more particularly described in the Summary of Lot Descriptions, copy of which is attached as Annex "B" in the Joint Venture Agreement, covered by individual Transfer Certificates of Title of the Registry of Deeds of Laguna, marked as Annexes "C-1" to "C-24", also of the same joint venture agreement; 2. The OWNER wishes to cause the development of the PROPERTY into a modern first-class residential subdivision, (the "SUBDIVISION PROJECT") and the remaining portion into a commercial center, (the "COMMERCIAL PROJECT"), both complete with all facilities, amenities and improvements compatible with the requisite to the desired development concepts therefor, and the marketing and selling of the individual subdivided residential and commercial lots that will be derived therefrom as a result of the said development; 3. The DEVELOPER, being confident of the desirability and viability of the development concepts being contemplated for the RESIDENTIAL and COMMERCIAL PROJECTS, and being the owner and developer of several other subdivisions and commercial projects, has proposed to the OWNER to undertake the completion and development of the projects contemplated herein; 4. Moldex Realty Marketing, Inc. ("MARKETING AGENT"), being likewise confident of the over-all marketability and saleability of the RESIDENTIAL and COMMERCIAL PROJECTS, and being the exclusive marketing of the PROJECTS, has likewise proposed to the OWNER to market and sell all the individual lots derived from the RESIDENTIAL and COMMERCIAL PROJECTS on an exclusive basis; 5. The OWNER being cognizant of the track record and performance of both DEVELOPER and MARKETING AGENT, and having full trust and confidence in their capacity and capability, has accepted their proposals for the development of the RESIDENTIAL and COMMERCIAL PROJECTS in an individual phase and integral part of the PROJECT and the marketing and sale of the individual lots therein, subject to payment of compensation as spelled out in the MOA; 6. For and in consideration of the foregoing premises, the OWNER has granted unto the DEVELOPER full and irrevocable rights and authority to subdivide and develop the PROPERTY into the desired RESIDENTIAL and COMMERCIAL PROJECTS, and likewise unto the MARKETING AGENT full and irrevocable rights and authority to market and sell all the individual lots therein on an exclusive basis; 7. Based on the joint venture agreement, which has been annotated in the title to the PROPERTY, it is the intention of the parties that to cause the development of the PROPERTY, the OWNER will be contributing in the joint venture the PROPERTY and the DEVELOPER the required development works. The parties agree to share in the net saleable area by assigning and transferring 60% of the total saleable area of the RESIDENTIAL PROJECT to the OWNER and the remaining 40% of the total saleable area of the RESIDENTIAL PROJECT to the DEVELOPER; and 57% of the COMMERCIAL PROJECT to the OWNER and the remaining 43% of the total saleable area of the COMMERCIAL PROJECT to the DEVELOPER; 8. After approval of the subdivision plans and verified survey returns for the PROPERTY, each individual and saleable lot shall be registered and titled under the name of its corresponding lot holder. All road lots and open spaces shall be titled under the joint ownership of the OWNER and DEVELOPER in accordance with the sharing ratio stipulated in Article III, Clause No. 1 of the joint venture agreement. The annotation on the mother title regarding the joint venture agreement shall be removed automatically with the generation of the titles to the individual lots in the PROJECTS; 9. The allocation and distribution of the individual subdivided lots to the co-venturers are mere return/distribution of their investment in the joint venture project and said transaction is not in the nature of "sales, barters, exchanges and leases of goods and properties, rendering of services, as defined under Section 105 of the 1997 Tax Code. Therefore, said transactions are not covered by VAT. However, the subsequent sales of the subdivided lots by the co-venturers to their customers are subject to the 10% VAT. 10. The contribution of land by the OWNER to the PROJECT is likewise not subject to capital gains tax presumed to have been realized from the sale, exchange or other disposition of real property because the transfer is not made in the course of business but only as capital contribution to the PROJECT; and 11. The subsequent disposition by the parties under the MOA of the lots allocated to them, the gain that may be realized by them from such sale shall be subject to the regular income tax. In reply, please be informed of the following: 1. The MOA executed between Moldex Realty, Inc. and the OWNER described above is an agreement between the parties to construct and fund the cost of construction of a modern first-class residential subdivision project which is neither a contract of sale over real property nor an instrument which conveys title to real property. Hence, no income tax or documentary stamp tax (DST) is due upon the execution of the MOA (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the MOA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code. (BIR Ruling No. DA-067-2002 dated May 5, 2002)) Section 22(B) of the 1997 Tax Code, provides: "(B) The term corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts ( cuentas en participation ), 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 MOA executed between the parties does not give rise to a taxable joint venture. 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 1997 Tax Code. (BIR Ruling No. 002-97 dated January 14, 1997) 2. The allocation and distribution of the residential and commercial lots to the DEVELOPER and the OWNER in accordance with their respective equity contributions as stipulated in the MOA is not subject to income tax, withholding tax or capital gains tax, since the allocation/distribution is without consideration, not in connection with a sale and constitutes mere return of capital. It is to be understood, however, that upon subsequent disposition by the parties under the MOA of the individual/subdivided lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rate provided under Section 27(A) of the 1997 Tax Code, capital gains tax imposed under Section 24(D) of the same Code, and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code based on the gross selling price or fair market value of the properties whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. ( BIR Ruling No. DA-262-2001 dated December 18, 2001 ) 3. The contribution of the OWNER to the PROJECT in the form of real property and the allocation of the subdivided lots among the DEVELOPER and the OWNER in exchange for their respective contributions, pursuant to the MOA/joint venture agreement are not subject to the capital gains tax imposed under Section 24(D) of the 1997 Tax Code. The OWNER did not convey or transfer their ownership or interest over their real property when they contributed the aforesaid parcel of land to the joint venture but merely pooled their resources into a common fund. The said contribution constituted their capital contribution to the joint venture project, therefore, such contribution is not a taxable event that will give rise to the payment of regular income tax, creditable withholding tax and capital gains tax because the transfer or conveyance is not in the course of business but a capital contribution. ( BIR Ruling No. DA-262-2001 dated November 18, 2001 ) 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. ESCDHA Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service