BIR Ruling [DA-240-01]

November 16, 2001 BIR RULING [DA-240-01] 22 (B), 27 (A), 196, 57 (B) DA-115-2001; DA-605-99 Filinvest Alabang, Inc . Filinvest, Corporate City Alabang-Zapote Road, Alabang Muntinlupa City Attention: Mr. Efren M . Reyes Senior Vice-President Gentlemen : This refers to your letter dated June 8, 2001, stating that Filinvest Alabang, Inc. (FAI), a corporation engaged in the business of real estate development will enter into a Project Investment Agreement with different investors for the development and construction of a 22-storey residential condominium building to be known as "The Vivant Flats" (hereinafter referred to as the "Project"); that the afore-stated Project will be construed on a parcel of land owned by FAI at the Filinvest Corporate City, Alabang, Muntinlupa City; that the subject property is covered by Transfer Certificate of Title No. 204954 with an area of 2,840 square meters with a zonal value of P156,200,000.00 at P55,000 per square meter; and that the salient provisions of the above-mentioned Agreement are as follows: a. Each Investor commits to invest by way of a capital contribution for the financing and/or funding of the Project. Such investment is in an amount equivalent to a percentage share in the total cost of development of the Project. The share of each Investor will be computed based on the estimate of the actual cost of the floor area of a particular condominium unit, subject to any cost adjustment arising from changes in the actual cost and/or the floor area. In return for their respective capital contribution, each Investor will receive the corresponding Condominium Certificate of Title for the condominium unit and its appurtenant parking space; b. The investor will open a Trust Account with a Trustee-Bank where his capital contribution and any additional contributions will be held, managed and disbursed. The Trustee-Bank shall hold in trust the capital contribution and title to the Project. If the Investor is a corporation, it may execute in lieu of the Trust Agreement, an Investment Management Agreement. Prior to the construction of the Project, the Investor shall deposit 30% of his required capital contribution to the Trust Account. He will then deposit the remaining 70% through internally generated funds and/or by availing of a construction credit line during the construction period. Upon completion of the Project, any excess funds or properties of the Trust Account, including ownership over the condominium units and its appurtenant parking spaces, shall be released to the Investors; c. The Trustee-Bank shall review and approve all disbursements for the Project and for the account of the Investor, and shall hold custody of any and all documents relating thereto. Upon approval of each disbursement, the Trustee-Bank shall debit from the Trust Account of the Investor the pro-rate share of the Investor in such disbursement and issue a check payable directly to the approved payee thereof; d. FAI is granting an option to the Investors to purchase the parcel of land on which the Project will be constructed on. Such option may be exercised on or before March 22, 2002 provided, that the combined capital contributions of the Investors account for at least 80% of the total number of condominium units. The Trustee-Bank shall exercise the option on behalf of the Investors upon notification by FAI that the 80% requirements has been met. Another option is for FAI to contribute the parcel of land in exchange for condominium units and parking spaces. If its exercises its option, FAI shall be entitled to full ownership of condominium units and appurtenant parking spaced corresponding to the value of its investment upon completion of the Project; e. The parcel of land where the Project will be constructed on, will be transferred by FAI to the Trustee-Bank, either by way of a sale in case the Investors collectively exercise the option to purchase such parcel of land, or by way of assignment in case FAI exercises the option to exchange it for an equivalent number of condominium units and parking spaces. Subsequently, the Trustee-Bank will convey the ownership of the parcel of land to a condominium corporation; f. FAI will be the Project Manager of the Project. It will be authorized to negotiate and execute contracts as may be required for the development of the Project with architects, construction management engineers, general building contractors and other parties deemed fit and necessary by FAI for the construction of the Project, to do the marketing and advertising of the Project concept to secure sufficient number of Investors, to secure the necessary permits and licenses that may be required and to do other acts necessary in the expeditious development of the Project. In return, FAI will receive a management fee; g. Prior to the completion of the Project, an Investor can assign his participation, rights and proportionate interest in the Project, provided it secures the written consent of FAI; and h. Upon completion of the Project, the Investors, including FAI, will form a condominium corporation for the purpose of holding title to, manage and maintain the land and the common areas of the Project, pursuant to the provisions of the Condominium Act. Subsequently, the parcel of land and the common areas will be conveyed by the Trustee-Bank in behalf of the Investors to the condominium corporation. CHcTIA You now request for a confirmation of the following: "1. The Agreement 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 National Internal Revenue Code (NIRC), as amended. Hence, the unincorporated joint venture created by the Investors is not subject to the corporate income tax under Section 24 of the NIRC. "2. The assignment of right of an Investor with respect to the Agreement is not subject to the capital gains tax, creditable withholding tax, value-added tax (VAT) and documentary stamp tax under Section 196 of the NIRC. "3. The transfer of the parcel of land by FAI to the Trustee-Bank as its capital contribution to the joint venture is not subject to income tax, capital gains tax, creditable withholding tax and VAT. "4. The transfer of the ownership of the condominium unit and parking slot by the Trustee-Bank to an Investor, as a return of his capital contribution, is not subject to income tax, VAT and documentary stamp tax under Section 196 of the NIRC. "5. The conveyance of the land and common areas in the condominium without any monetary consideration to a condominium corporation is not subject to income tax, VAT and documentary stamp tax under Section 196 of the NIRC." In reply, please be informed as follows: 1. Pursuant to Section 22 (B) of the Tax Code of 1997, the term corporation includes partnership, no matter how created or organized, joint stock companies, joint accounts (cuentas en participation), association or insurance companies, but does not include general professional partnerships, and a joint venture or consortium formed for the purpose of undertaking construction project or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. P.D. No. 929 amended the definition of the taxable corporation 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. TEAcCD 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 venture entered into by and between FAI and the Investors is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. However, FAI, as well as all the investors are separately subject to the regular income tax on their taxable income during such taxable year respectively derived by them from the construction project. 2. The assignment of rights under the Agreement by an Investor is not subject to capital gains tax, creditable withholding tax, VAT and the documentary stamp tax under Section 196 of the 1997 Tax Code. Such transaction does not partake the nature of a sale, because in assignment of rights, the assignee merely steps into the shoes of the assignor without acquiring a better right than what the assignor had in the property to which the rights assigned pertains. A deed of assignment of rights in real property is not a deed of sale of real property itself but the rights pertaining to such property. (BIR Ruling No. DA-252-96 dated July 18, 1996) 3. In case FAI exercises its option to transfer the ownership of the parcel of land to the Trustee-Bank as its capital contribution, such conveyance is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax. Such conveyance is but a capital contribution to the joint venture and therefore not a taxable event. The transfer is also not subject to VAT, since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchange, leases goods or properties, renders services and any person who import goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing the parcel of land FAI neither sells, barters, exchanges goods, properties not renders services to be subject to VAT. (BIR Ruling No. DA-115-2001 dated September 5, 2001) ATcaHS 4. The distribution of the condominium units and appurtenant parking spaces of the project between FAI and the Investors in consideration of their respective contributions, as stipulated in the Project Investment Agreement is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. However, upon the subsequent disposition by the co-venturers of the areas allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rate under Section 27(A) of the Tax Code of 1997, and to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, 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. The Partition Agreement whereby FAI and the Investors will allocate unto each other their share in the saleable area in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area between the parties, as the return of the capital which each contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. 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 is without consideration and is not in connection with a sale, no income was generated and fortiori, no documentary stamp tax are payable and collectible. 5. The transaction transferring to the condominium corporation the management of the common areas of the aforesaid Project will not be subject to creditable withholding tax pursuant to Section 57(B) in relation to Section 27 of the Tax Code of 1997. Neither is it subject to the documentary stamp tax imposed under Section 196 of the same Code, because conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable. But the notarial acknowledgment to said deed is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. 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.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service