BIR Ruling [DA-194-06]

March 28, 2006 BIR RULING [DA-194-06] 22 B; DA-247-2001 E. L. Punsalan and Associates Certified Public Accountants G-104 Medical Plaza Makati Amorsolo corner Dela Rosa Street Legaspi Village, Makati City Attention: Atty. Eranio L. Punsalan Partner Gentlemen : This refers to your letter dated March 27, 2006 requesting on behalf of your client, CENTURY PROPERTIES, INC, (CPI) for confirmation of your opinion on the following issues, viz : 1. The Joint Venture or Co-Development, Allocation and Construction Management Agreement between and among the Joint Owners consisting of UCPB, CPI and Co-Development Partners is not subject to income tax as a separate corporation as it is not a taxable joint venture, pursuant to Section 22(B) of the Tax Code of 1997; 2. The contribution of land by UCPB to the project is likewise not subject to VAT because the transfer is not made in the course of business but only a capital contribution and that the same property being transferred to the project is a capital asset; 3. The assignment and delivery of the developed units to each Joint Owner, as stipulated in the Agreement, is not a taxable event and not subject to income tax, withholding tax and value-added tax, considering that the same is not in connection with a sale, but merely a transaction to effect the return of their respective capital contribution to the joint venture; It is to be understood however, that upon subsequent disposition by the parties under the Co-Development. Allocation and Construction Management Agreement of the units allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax provided under the pertinent provision of the Tax Code of 1997 and to the expanded withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001; IATSHE 4. The agreement for the partitioning of units embodied in the Co-Development, Allocation and Construction Management Agreement, whereby the Joint Owner will allocate to each other their respective shares in the developed project is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, since the allocation is made without monetary consideration and is made to segregate their respective areas representing the return of capital which each has contributed; and 5. The conveyance of land and common areas of the Project in favor of the condominium corporation being without monetary consideration and is not in connection with a sale made to the condominium corporation, no income was generated and a fortiori , no income and/or creditable withholding tax is payable and collectible. Since the said conveyance is not a sale, it is likewise not subject to VAT imposed under Section 106 of the Tax Code of 1997, neither will it be subject to the documentary stamp tax on sales or conveyance of real property imposed under Section 196 of the same Code. However, the notarial acknowledgement to said Deed of Conveyance is subject to documentary stamp tax of fifteen (P15.00) pursuant to Section 188 of the Tax Code of 1997." It is represented that United Coconut Planters Bank (UCPB) is the owner of the parcel of land covered by TCT No. 217179 located at H.V. Dela Costa Street, Salcedo Village, Makati City, consisting of 1,223 sq. m. more or less, which it contributed to the condominium project, herein referred to as the Project Owner. Century Properties, Inc. (CPI), a corporation duly registered under Philippine laws, is a company engaged in the construction and management of high-rise condominium buildings and has the necessary experience and technical capability. CPI is herein referred to as the Project Manager. As Project Manager, it undertakes to perform the development and construction work for the entire project, contributing its development expertise and providing joint-financing in this purpose. On behalf of the Project Owner, CPI shall invite a sufficient number of investors for the project who themselves will undertake to participate in the development of the project and who shall eventually be the owners of the individual units that comprise the same (investors). The Project Owner and the Project Manager, together with some private investors forming the Condominium Corporation herein named as Co-Development Partners will enter into a joint venture contract denominated as Co-Development, Allocation and Construction Management Agreement for the purpose of the construction, management and financing of the proposed condominium project. The individual Co-Development Partners, as members of the condominium corporation, and as pro-indiviso , pro rata owners of the project shall provide cash capital denominated as Construction Funding Contribution corresponding to the proportion that the said contribution bears to the aggregate area of the project. Finally, all the parties will be Joint Owners of the project in proportion to their respective contributions to their sharing agreement. In reply, please be informed that this Office hereby confirms your opinion, as follows: THcaDA 1. The Joint Venture/Co-Development, Allocation and Construction Management Agreement executed among the Joint Owners consisting of UCPB, CPI and Co-Development Partners described above is an agreement between the parties to construct and fund the cost of construction of a condominium 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 Joint Venture/Co-Development, Allocation and Construction Management Agreement (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the Joint Venture/Co-Development, Allocation and Construction Management Agreement is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code, as amended. ( BIR Ruling No. DA-247-2001 dated November 27, 2001 ) Section 22(B) of the 1997 Tax Code, as amended, 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 Joint Venture/Co-Development, Allocation and Construction Management Agreement executed between the herein 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 contribution of land by UCPB to the project is not subject to VAT because the transfer is not made in the course of business but only a capital contribution and that the same property being transferred to the project is a capital asset. 3. The allocation and distribution of the developed units to each Joint Owner, in accordance with their respective equity contributions as stipulated in the Agreement 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 Agreement of the developed units 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, as amended by RA 9337, 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 last amended by Revenue Regulations No. 30-2003. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code, as amended, 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 ) SaDICE 4. The Agreement for the partitioning of units embodied in the Joint Venture/Co-Development, Allocation and Construction Management Agreement, whereby the Joint Owners will allocate to each other their respective shares in the developed project is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, since the allocation is made without monetary consideration and is made to segregate their respective areas representing the return of capital which each has contributed to the project. 5. The conveyance of the land and common areas of the Project in favor of the condominium corporation being without monetary consideration and is not in connection with a sale made to the condominium corporation, no income was generated and a fortiori , no income and/or creditable withholding tax is payable and collectible. Since the said conveyance is not a sale, it is likewise not subject to VAT imposed under Section 106 of the Tax Code of 1997, as amended, neither will it be subject to the documentary stamp tax on sales or conveyance of real property imposed under Section 196 of the same Code. However, the notarial acknowledgement to said Deed of Conveyance is subject to documentary stamp tax of fifteen (P15.00) pursuant to Section 188 of the Tax Code of 1997. ( DA-040-2001 dated March 20, 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) PABLO M. BASTES, JR. OIC, Head Revenue Executive Assistant Legal Service