SGV & Co.

March 25, 2008 BIR RULING [DA-196-08] 22 (B); DA-338-05 SGV & Co. 6760 Ayala Ave. Makati City Attention: Atty. M.F. A. Balili Partner Gentlemen : This refers to your letter dated August 19, 2007 requesting on behalf of your client, Federal Land, Inc. (FLI), for a confirmation on the tax consequences of its joint venture agreement with Heritage Consolidated Assets, Inc. (HCAI) for the development of a condominium project known as Marquinton Residences Clusters A, B and C (the "Marquinton Project"). The facts as represented are as follows: FLI is a real estate developer of various residential, commercial and mixed-use property developments such as Bay Garden in the reclamation area in Roxas Boulevard and Oriental Garden in Makati City. HCAI, on the other hand, is the owner of various properties, one of which is a property along Sumulong Highway in Marikina City. FLI and HCAI executed a Memorandum of Agreement (MOA) on October 28, 2005 and related documents on July 9, 2007 (Supplement to the October 28, 2005 MOA) and July 17, 2007 (Addendum to MOA and Supplement to MOA), collectively, the "Agreements", for the construction of Marquinton Residences Clusters A, B and C, a multi-storey residential and commercial condominium project situated in Sumulong Highway, Marikina City (the "Marquinton Project"). Under the Agreements, HCAI, as landowner, shall contribute the land and FLI, as developer, shall provide the necessary expertise for the construction and development of the project and perform all the development work. In consideration of, and a return on, the respective contributions of the parties, specifically designated condominium units and parking slots in the Project will be allocated in separate ownership between the parties, in the following proportion: CDTSEI Landowner Developer Cluster A 8.78% 91.22% Cluster B 8.78% 91.22% Cluster C 7% 93% Thus, the Condominium Certificates of Title (CCTs) covering the units and parking slots allocated for HCAI as the Landowner's Share in the Project will be issued in the name of HCAI, while the CCTs covering the units and parking slots allocated for FLI as Developer's Share in the Project will be transferred to, and held and managed by, a non-stock, non-profit condominium corporation formed pursuant to the provisions of the Condominium Act. Under the July 9, 2007 Supplement to the October 28, 2005 MOA, FLI and HCAI agreed that, with respect to Cluster C of the Marquinton Project, the CCTs covering the units and parking slots allocated for HCAI as the Landowner's Share in the said Cluster C will be issued in the name of FLI but only as Trustee for HCAI. Thus, the CCTs for HCAI's units and parking slots as Landowner's Share in Cluster C will be issued in the name of "FEDERAL LAND, INC. as Trustee and in Trust for HERITAGE CONSOLIDATED ASSETS, INC." This arrangement for issuing the CCTs for HCAI's share in the units and parking slots in Cluster C is intended to expedite and facilitate the marketing, sale and disposition of the units in Cluster C. Despite this change in the issuance of the CCTs for HCAI's share in the floors and parking slots in Cluster C, HCAI will maintain separate and legal ownership of its units and parking slots and, accordingly, all income and expenses related to the sale of its units/parking slots shall accrue to, and be for its account, and all taxes related thereto shall be payable and reportable by HCAI. Similarly, FLI will maintain separate and legal ownership of its units and parking slots and, accordingly, all income and expenses related to the sale of its units/parking slots shall accrue to, and be for its account, and all taxes related thereto shall be payable and reportable by FLI. Based on the foregoing representation, you now request your confirmation of the following opinion that: 1. The October 28, 2005 MOA, July 9, 2007 Supplement to the MOA, and the July 17, 2007 Addendum to MOA and Supplement to MOA between FLI and HCAI will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A) of the 1997 Tax Code. aCSTDc 2. The contribution of HCAI in the form of real property is not subject to income tax, creditable withholding tax (CWT), and VAT under Section 106 of the Tax Code since it does not constitute a sale of property in the course of trade or business but is a capital contribution to the Project. 3. The partition/allocation of saleable condominium units and parking slots between FLI and HCAI in consideration of their respective contributions is not a taxable event and is not subject to income tax, CWT, value-added tax (VAT) and documentary stamp tax (DST) because it is a mere return of capital that each has contributed to the Project. 4. The agreement in July 9, 2007 Supplement to MOA that the CCTs for HCAI's units and parking slots as Landowner's Share in Cluster C of the Marquinton Project will be issued in the name of FLI as Trustee and in Trust for HCAI is not a taxable event and is not subject to income tax, CWT, VAT and DST, because it is not a sale and there is no transfer of title from HCAI to FLI. 5. The transfer of the title to the land and common areas to the Condominium Corporation is not subject to income tax, CWT, VAT and DST under Section 196 of the Tax Code since the transfer is made without monetary consideration. 6. The subsequent disposition by the parties under the MOA of the lots allocated to them shall be subject to income tax, CWT, VAT and DST under Section 196 of the Tax Code. In reply, please be informed that this Office hereby confirms your opinion as follows: 1. The unincorporated joint venture arising from the October 28, 2005 MOA and the July 9, 2007 Supplement to MOA, as well as the Addendum to MOA and Supplement to MOA dated July 17, 2007 between FLI and HCAI for the development and construction of the Marquinton Project, and the allocation of their respective share in the units and parking slots in the Project, will not give rise to a taxable joint venture separate and distinct from the parties, within the meaning of Section 22 (B), in relation to Section 27(A) of the Tax Code. EcAISC Section 22 (B) of the 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 operation or consortium agreement under a service contract with the government. . . ." In BIR Ruling DA-379-05 dated September 5, 2005, involving a joint venture between Manila Jockey Club, Inc. (MJCI) and Community Innovations, Inc. (CII) for the joint development of a primarily residential complex consisting of condominium buildings and townhouses with MJCI as the landowner and CII as the developer, it was ruled: "Considering 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 is of the opinion as it hereby holds that the Joint Development Agreements entered into by and among CII and MJCI is not the subject to the corporate income tax under Section 27(A) of the Tax Code of 1997." In this Office's BIR Ruling No. 317-92 dated October 20, 1992, this Office held that the elements of a taxable joint venture are as follows: 1. Each party to the venture must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, material or money; 2. Profits must be shared among the parties; 3. There must be a joint proprietary and right of mutual control over the subject matter of the enterprise; SEIcAD 4. Usually, there is a single business transaction rather than a general or continuous transaction. Based on the aforestated Agreements between FLI and HCAI, no profits will be shared by the parties because once the development and construction of the Project is completed, each party will take separate ownership of specifically-identified units and parking slots in the Marquinton Project based on their contributions to the Project. Each party will then be free to sell its share of the units and parking slots to third parties. Hence, the parties shall be separately subject to the applicable income tax on their taxable income during each taxable year respectively derived by them from their sales of their share in the project. (BIR Ruling Nos. UN 328-94 dated November 22, 1994) Accordingly, the unincorporated joint venture formed pursuant to the MOA and FLI and HCAI is excluded from the definition of taxable corporation under Section 27 (A) of the Tax code and is, consequently, not subject to corporate income tax. However, FLI and HCAI are separately subject to the applicable income tax on their taxable income during each taxable year respectively derived by them from their sales of their share in the Project. 2. HCAI's contribution of land to the Project is not subject to income tax, CWT, VAT and DST since it does not constitute a sale of property in the course of trade or business, but is a capital contribution to the Project which is not a taxable event. In BIR Ruling No. DA-338-05 dated August 5, 2005, we ruled that the contribution of the owners to the Project in the form of real property pursuant to a joint venture agreement is not subject to the payment of income tax, CWT and capital gains tax (CGT) because the transfer or conveyance is not in the course of business but is a capital contribution. Moreover, in another ruling, BIR Ruling No. DA-204-03 dated June 30, 2003, it was ruled that in contributing their parcels of land for the construction of a residential subdivision, Apex Philippines & Development Corporation and Masagana Management Services Corporation neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. 3. The partition/allocation of condominium units and parking slots between FLI and HCAI in consideration of their respective contributions is not a taxable event and is not subject to income tax, CWT, VAT and DST, because it is a mere return of capital that each has contributed to the Project. IcDCaS Section 36 of Revenue Regulations (RR) No. 2, otherwise known as the Income Tax Regulations, explicitly provides: "Income, in the broad sense, meaning all wealth which flows into the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains or profits, including gains derived from the sale or other disposition of assets." Being a mere return of the capital that each party contributed to the Project, the allocation of each party's share in the units and parking slots in the Project does not yet result in the realization of gain. In BIR Ruling No. DA-379-05, this Office further ruled that the allocation and distribution of the respective shares of the parties to the joint venture in the project in consideration of their respective contributions is not a taxable event and is not subject to income tax, CWT, VAT and DST because the allocation is a mere return of capital that each has contributed. As a result, the allocation of saleable condominium units and parking slots between FLI and HCAI in consideration of their respective contributions is not a taxable event and is not subject to income tax, CWT, VAT, and DST under Section 196 of the Tax Code. cEaCAH 4. The agreement in the July 9, 2007 Supplement to MOA that the CCTs for HCAI's units and parking slots as Landowner's Share in Cluster C of the Marquinton Project will be issued in the name of FLI as Trustee and in Trust for HCAI is not a taxable event and is not subject to income tax, CWT, VAT and DST, because it is not a sale and there is no transfer of title from HCAI to FLI, but is intended to expedite and facilitate the marketing, sale and disposition of the units in Cluster C. Despite the fact that the CCTs for HCAI's share in the floors and parking slots in Cluster C will be issued in the name of FLI as Trustee and in Trust for HCAI, HCAI will maintain separate and legal ownership of its units and parking slots and, accordingly, all income and expenses related to the sale of its units/parking slots shall accrue to, and be for its account, and all taxes related thereto shall be payable and reportable by HCAI. In BIR Ruling No. DA-013-05 dated January 19, 2005, this Office ruled that an agreement that all the titles to be issued in the name of the developer per an amendment to an original Joint Venture Agreement and as annotated at the back of the mother title for the purpose of expediting the sale of the units is not a taxable event. As such, this Office opines that the transfer is made without any monetary consideration and thus no income tax will be payable and collective thereon. The BIR further ruled that conveyance of realties to trustees or other persons without consideration is not taxable under Section 185 of the Revised Documentary Stamp Tax Regulations. 5. The transfer of the title to the land and common areas to the Condominium Corporation is not subject to income tax, CWT, VAT and DST under Section 196 of the Tax Code, as amended since the transfer is made without monetary consideration. cTECHI In BIR Ruling No. DA-506-05 dated December 16, 2005, it was ruled that the transfer of land and common areas to the condominium corporation upon completion of the Project shall not be subject to income tax under Section 27 (A) of the Tax Code of 1997, and consequently to the CWT imposed under RR No. 2-98, as amended. Moreover, neither is the transfer subject to VAT under Section 106 of the Tax Code, as amended and the DST under Section 196, as amended. This is because no consideration is made for the transfer, hence, no income will be generated thereto. The transfer of the land and common areas to the condominium corporation being made pursuant to Republic Act (RA) No. 4726, otherwise known as the Condominium Act, as there is no gain, presumed or actual, to be realized from the transfer. 6. The subsequent disposition by the parties of the units and parking slots allocated to them shall be subject to income tax, CWT, VAT and DST under Section 196 of the Tax Code, as amended, based on their respective income, cost basis and expenses in the Project. Although the joint venture is not a taxable entity, the co-venturers are separate taxable entities and the sale of their respective units under the Deed of Partition is a taxable event, this Office proceeds as follows: "It is to be understood however that upon subsequent disposition by the parties under the Joint Venture Agreements 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 last amended by RR No. 30-2003. 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 which ever is higher. Furthermore, the said sale shall likewise be subject to VAT." 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. DSTCIa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service