BIR Ruling [DA-241-06]

April 11, 2006 BIR RULING [DA-241-06] 22 (B); DA-194-2006 Atty. Alan B. Quintana 2nd Floor, Renaissance Tower Meralco Ave., Pasig City S i r : This refers to your letter dated August 17, 2005 requesting for exemption from capital gains tax, documentary stamp tax and value-added tax on the partition and assignment of condominium units under a joint venture arrangement for a condominium development project. It appears that Basic Urban Infrastructure and Land Development, Inc. (BUILD) is the registered and legal owner of a parcel of land located at Ignaciana St., Barangay Kalusugan, New Manila, Quezon City, presently covered by Transfer Certificate of Title (TCT) No. N-162793 of the Registry of Deeds for Quezon City. Pursuant to a Project Agreement which was later amended to become Amended Project Agreement on July 21, 2005, BUILD entered into a joint venture arrangement with Fil-Estate Properties, Inc. (FEPI) and Cathedral Heights Holdings, Inc. (CHHI) for the development of the above-stated parcel of land into a condominium project. BUILD will contribute its landholding, while FEPI and CHHI will finance and infuse technical and development works on the project as their capital contributions, respectively. You are now in the process of having the condominium titles issued and consequently, partitioning and assigning the condominium units among the parties representing their separate shares in the returns of the joint venture condominium project. In reply, please be informed as follows: 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 participacion ), 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. 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. IADaSE 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 among BUILD, FEPI and CHHI is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. The allocation of the developed condominium units of the project among BUILD, FEPI and CHHI, in consideration of their respective contributions, as stipulated in the Amended Project 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. (BIR Ruling No. DA-192-2001 dated October 17, 2001) 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, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing its parcel of land, BUILD, neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The Partition Agreement whereby BUILD, FEPI and CHHI will allocate unto each other their shares in the condominium units 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 has 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. It is understood however, that upon 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 creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 27(D)(5), as the case may be. Moreover, such 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 in 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) PABLO M. BASTES, JR. OIC, Head Revenue Executive Assistant Legal Service