BIR Ruling [DA-207-99]

April 5, 1999 BIR RULING [DA-207-99] PBR Management & Development Corporation 103 A. Bunye Street, Alabang Muntinlupa City Attention: Ms . Pauline B . Chiongbian Vice-President Gentlemen : This refers to your letter dated February 5, 1999 stating that Z. E. Bunye and Sons, Inc., a corporation duly organized and existing under the laws of the Philippines with business address at Z.E. Bunye Compound, Ilaya St., Alabang, Muntinlupa City and the owner of three (3) parcels of land situated in Barangay Alabang, Muntinlupa City covered by Transfer Certificates of Title Nos. S-77416, S-77417 and S-77418 of the Registry of Deeds for Makati City entered into a Memorandum of Agreement with PBR Management and Development Corporation, also a corporation duly registered under and by virtue of the Philippine laws with business address at No. 103 A. Bunye St., Alabang, Muntinlupa City on February 3, 1998 whereby they will jointly participate in the construction of condominium buildings on the three (3) parcels of land owned by Z. E. Bunye and Sons, Inc.; that the Memorandum of Agreement provides for the following terms and conditions: 1. Z. E. Bunye and Sons, Inc. will contribute to the construction project three (3) parcels of land located at Z. E. Bunye Compound, Ilaya St., Alabang Muntinlupa City; 2. PBR Management and Development Corporation shall develop, erect and construct two (2) five (5) storey buildings on the above-described parcels of land in accordance with R.A. No. 4726, otherwise known as the Condominium Act; 3. Upon completion of the condominium buildings and as a return of the contributions made by the parties to the construction project, specific floors or portions of floors in the condominium buildings shall be allocated in separate ownership between Z. E. Bunye and Sons, Inc. and PBR Management and Development Corporation; and 4. Z. E. Bunye and Sons, Inc. and PBR Management and Development Corporation will form a condominium corporation that will hold title to, manage, and maintain the land and the common areas pursuant to the provisions of R.A. 4726. For this purpose, Z. E. Bunye and Sons, Inc. and PBR Management and Development Corporation will transfer the land and the common areas to the condominium corporation, without any monetary consideration, by executing a Deed of Conveyance in favor of said corporation. Based on the foregoing, you now request for a ruling on the following issued: "1. The Memorandum of Agreement executed by Z. E. Bunye and Sons, Inc. and PBR Management and Development Corporation for the construction and development of condominium buildings, and the allocation of their specific floors or units therein will not give rise to a separate taxable joint venture within the meaning of Section 20(b), in relation to Section 24 (a) of the Tax Code. "2. The allocation between Z. E. Bunye and Sons, Inc. and PBR Management and Development Corporation of the floors or units therein in consideration of their contribution in the project, as stipulated in the Memorandum of Agreement, is not a 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. "3. The Deed of Partition whereby Z. E. Bunye and Sons, Inc. and PBR Management and Development Corporation will allocate unto each other their respective shares in the floors or units in the project, in consideration of their respective contributions in the project, is also not subject to documentary stamp tax imposed under Section 196 of the Tax Code, because the allocation is made without monetary consideration and is not in connection with a sale. Instead, the partition is made merely to segregate the floors or units between the parties, as the return of the capital which each contributed to the project; and "4. The Deed of Conveyance to be executed by Z. E. Bunye and Sons, Inc. and PBR Management and Development Corporation in favor of the condominium corporation that will hold title to, manage, and maintain the land and the common areas pursuant to the provisions of R. A. 4726 will not be subject to income tax, expanded withholding tax and documentary stamp tax." In reply, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, the term "corporation" includes 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. Thus, it is our opinion that the joint venture of Z. E. Bunye and Sons, Inc. and PBR Management and Development Corporation 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 aforesaid construction project. Considering the foregoing, the Memorandum of Agreement executed by Z. E. Bunye and Sons, Inc. and PBR Management and Development Corporation for the construction and development of the project, and the allocation of their specific floors or units in the project 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 Z. E. Bunye and Sons, Inc. and PBR Management and Development Corporation of the floors or units therein in consideration of their contribution in the project, as stipulated in the Memorandum of Agreement, is not a taxable event and is not subject to income/expanded withholding tax, because the allocation is a mere return of the capital that each has contributed to the project. However, should Z.E. Bunye and Sons, Inc. and PBR Management and Development Corporation sell any of the floors or portions of the floors allocated to them to third parties, the gain that may be realized by Z. E. Bunye and Sons, Inc. and PBR Management and Development Corporation from such sale will be subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997, and to the creditable/expanded withholding tax under Revenue Regulations 2-98, as amended. (BIR Rulings No. 274-92 dated September 30, 1992 and UN-025-95 dated January 11, 1995) and the transfer shall be subject to the documentary stamp tax imposed under Section 196 of the same Code, based on the consideration or the fair market value of the property, whichever is higher. cdta Moreover, Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26) provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Accordingly, the Partition Agreement and Assignment of Land Titles to Condominium Corporation to be executed between the parties are without consideration and are not in connection with a sale made to Z.E. Bunye and Sons, Inc. and PBR Management and Development Corporation, respectively, no income will be generated and a fortiori, no creditable/expanded withholding and documentary stamp taxes are payable and collectible. However, the acknowledgements to said Partition Agreement and Assignment of Land Titles to Condominium Corporation are subject to the documentary stamp tax of P15.00 each pursuant to Section 188 of the Tax Code of 1997. In view thereof, the Partition Agreement whereby Z.E. Bunye and sons, Inc. and PBR Management and development Corporation, allocate unto each other their respective shares in the floors or units and parkings slots in the project, in consideration of their respective contributions in the project, and that the Assignment of Land Titles to Condominium Corporation to be executed by Z.E. Bunye and Sons, Inc. to convey the land to a condominium corporation formed pursuant to the Condominium Act, considering both are without monetary consideration, will not be subject to income creditable/expanded withholding and documentary stamp taxes under Section 196 of the Tax Code of 1997. (BIR Ruling No. 207-92 dated July 16, 1992, 349-93 dated July 30, 1993 and UN-025-95 dated January 11, 1995) 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue