Adelfa Properties

April 9, 2008 BIR RULING [DA-222-08] 22 (B); DA-586-2007 Adelfa Properties 3/F Las Pias Business Center Alabang-Zapote Road Talon, Las Pias City Attention: Mr. Jerry M. Navarrete President Gentlemen : This refers to your letter dated November 15, 2007 requesting for confirmation of your opinion that: 1. The Land Development Agreement (LDA) executed by and among Stella V. Lawson, Gaspar A. Vibal, Aida V. Guttierez, Nila V. Mata, Rosauro A. Vibal and Vibal Publishing House, Inc. as the "LANDOWNERS" and Adelfa Properties, Inc. as the "DEVELOPER" for the development of eight (8) parcels of land located at Dasmarias, Cavite, covered by Transfer Certificate of Title Nos. T-391197, T-236012, T-236013, T-236014, T-236015, T-236016, T-236017 and T-236017, with an aggregate area of 258,595 square meters into a residential subdivision, will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A), both of the National Internal Revenue Code (NIRC), as amended; 2. The allocation of resulting saleable lots between the LANDOWNERS and DEVELOPER in consideration of their respective contributions, as stipulated in the LDA, is not a taxable event and is not subject to income tax, and subsequently withholding tax, and the Value-Added Tax (VAT), since the allocation of saleable lots is in fact a mere return of capital that each has contributed; 3. The partition of resulting saleable lots pursuant to the LDA whereby the LANDOWNERS and DEVELOPER allocated unto each other their share in the saleable lots in consideration of their respective contributions, is not subject to the Documentary Stamp Tax (DST) imposed under Section 196 of the NIRC, as amended, nor to any income tax, and consequently withholding tax, since the allocation is made without monetary consideration and is not in connection with a sale. Rather, the partition is made merely to segregate the saleable lots between the parties, as the return of the capital which each contributed. However, it is understood that should the LANDOWNERS and/or DEVELOPER sell any of the saleable lots allocated to them, to third parties, the gain that may be realized from said sale will be subject to regular (corporate) income tax, in accordance with Section 27 of the NIRC, as amended by Republic Act No. 9337 and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as last amended by RR No. 30-2003. Based on the representations, as well as from the documents submitted, the facts are as follows: On August 30, 2006, a Land Development Agreement ("LDA") was executed by and among Stella V. Lawson, Gaspar A. Vibal, Aida V. Guttierez, Nila V. Mata, Rosauro A. Vibal and Vibal Publishing House, Inc. (Landowners) and Adelfa Properties, Inc. (Developer). Pursuant thereto, the parties agreed that the LANDOWNERS shall contribute eight (8) parcels of land to the joint venture project, and the DEVELOPER shall undertake to develop the subject properties into a residential subdivision, covering the development of said eight (8) parcels of land with an aggregate area of Two Hundred Fifty Eight Thousand Five Hundred Ninety Five (258,595) square meters, covered by TCT Nos. T-391197, T-236012, T-236013, T-236014, T-236015, T-236016, T-236017 and T-236017, as contribution of the DEVELOPER. We reply as follows: 1. The LDA executed between the LANDOWNERS and DEVELOPER described above is an agreement between the parties for the subdivision and development of the aforementioned parcels of land into a residential subdivision with commercial area 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 LDA (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the LDA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code, as amended. (BIR Ruling No. DA-303-2005 dated July 5, 2005) 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." P.D. No. 929 amended the definition of the taxable corporation so as not to include joint venture formed for the purpose of undertaking construction projects. The reasons for such amendment are (1) Local contractors contribute substantially to the development program of the country; (2) Local contractors are at a disadvantage in competitive bidding with foreign contractors in view of limited capital and financial resources; (3) In order to be able to compete with big foreign contractors, it may be necessary for them to enter into joint ventures to pool their limited resources in undertaking big construction projects; (4) To assist them in achieving competitiveness with foreign contractors, the joint ventures formed by them should not be considered an additional income tax lien. From the foregoing definition of a corporation, we confirm your opinion that the LDA 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, as amended. (BIR Ruling No. 002-97 dated January 14, 1997) 2. The allocation and distribution of the saleable lots to the LANDOWNERS and DEVELOPER in accordance with their respective equity contributions as stipulated in the LDA 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. Likewise, the said allocation and distribution is not subject to DST for want of consideration. It is to be understood, however, that upon subsequent disposition by the parties under the LDA 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, as amended by R.A. No. 9337, capital gains tax imposed under Section 24 (D) of the same Code, and to the creditable withholding tax under Revenue Regulations (RR) 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, 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, as implemented by RR No. 16-2005, as amended by RR 4-2007. (BIR Ruling No. DA-262-2001 dated December 18, 2001) 3. The Deed/Agreement of Partition whereby the LANDOWNERS and DEVELOPER have allocated unto each other their share in the saleable lots in consideration of their respective contributions are not subject to the DST imposed under Section 196 of the NIRC, as amended, considering that the allocation is made without monetary consideration and is not in connection with a sale. In this regard, 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, since the aforementioned Deed of Partition was executed without consideration and was not in connection with a sale between the LANDOWNERS and DEVELOPER, no DST is due and collectible on said Deed of Partition. However, we understand that the notarial acknowledgments to said Deed of Partition shall be subject to the DST pursuant to Section 188 of the NIRC, as amended, in the amount of P15.00. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service