BIR Ruling [DA-245-05]

June 7, 2005 BIR RULING [DA-245-05] S.22 (B); DA 247-01/11-27-01 E. L. Punsalan and Associates Certified Public Accountants G-104 Medical Plaza Makati Amorsolo corner Dela Rosa Street, Legaspi Village Makati City Attention: Atty. Eranio L. Punsalan Gentlemen : This refers to your letter dated June 1, 2005 requesting on behalf of MERIDIEN EAST REALTY AND DEVELOPMENT CORPORATION (MERIDIEN for brevity), an opinion on the proposed construction of a condominium project under a build-to-own concept pursuant to a Co-Development and Construction Management Agreement. The facts, as you represent, are as follows: MERIDIEN is a corporation duly registered under the Philippine laws with principal office address as West of Ayala Building, 252 Sen. Gil Puyat Ave., Makati City. It is a company engaged in the construction and management of high-rise condominium buildings and has the necessary experience and technical capability, which is hereinafter referred to as the Project Manager. As Project Manager, it undertakes to perform the development and construction work for the entire project, contributing its development expertise and providing joint-financing for this purpose. In behalf of the Project Owner, it shall invite a sufficient number of investors for the project who themselves will undertake to participate in the development of the project and who shall eventually be the owners of the individual units that comprise the same (investors). CENTURY PROPERTIES, INC. (CPI for brevity) is the owner of the parcel of land located at Bonifacio Global City in Taguig, Metro Manila, which it intends to contribute to the condominium project. It is covered by TCT No. 12965, subject matter of an Absolute Deed of Sale between the Bases Conversion Development Authority (BCDA for brevity) as the Seller and CPI, as the Buyer, the latter is hereinafter referred to as the Project Owner. THEcAS The Project Owner and the Project Manager, together with some private investors, forming the Condominium Corporation herein named as Co-Development Partners, will enter into a joint-venture contract denominated as Co-Development and Construction Management Agreement for the purpose of; the construction, management, and financing of the proposed condominium project. The individual Co-Development Partners, as members of the condominium corporation, as pro indiviso, pro rata owners of the project shall provide cash capital denominated as Construction Funding Contribution corresponding to the proportion that the said contribution bears to the aggregate area of the project. All the parties will be Joint Owners of the project in proportion to their respective contributions, to their sharing agreement. In consideration of the foregoing facts and circumstances, you now seek confirmation of your opinion on the following tax matters: 1. The Joint Venture or Co-Development and Construction Management Agreement between and among the Joint Owners consisting of CPI, MERIDIEN and Co-Development Partners is not subject to income tax as a separate corporation as it is not a taxable joint venture pursuant to Section 22(B) of the Tax Code of 1997; 2. The contribution of land by CPI to the project is likewise not subject to the ten percent (10%) VAT because the transfer is not made in the course of business but only a capital contribution and that the same property being transferred to the project is a capital asset; 3. The assignment and delivery of the developed units to each Joint Owner, as stipulated in the Agreement, is not a taxable event and not subject to income tax, withholding tax and VAT, considering that the same is not in connection with a sale, but merely a transaction to effect the return of their respective capital contribution to the joint venture; It is to be understood, however, that upon subsequent disposition by the parties under the Co-Development and Construction Management Agreement of the units allocated to them, the gain that may be realized by them from such sale will be subject to the regular income provided under the pertinent provision of the Tax Code of 1997 and to the expanded withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001; 4. The agreement for the partitioning of units embodied in the Co-Development and Construction Management Agreement, whereby the Joint Owners will allocate to each other their respective shares in the developed Project is subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 since the allocation is made without monetary consideration and is made to segregate their respective areas representing the return of capital which each has contributed; and 5. The conveyance of the land and common areas of the Project in favor of the condominium corporation being without monetary consideration and is not in connection with a sale made to the condominium corporation, no income was generated and a fortiori , no income and/or creditable withholding tax is payable and collectible. Since the said conveyance is not a sale, it is likewise not subject to the ten percent (10%) VAT imposed under Section 106 of the Tax Code of 1997, neither will it be subject to the documentary stamp tax on sale or conveyance of real property imposed under Section 196 of the same Code.However, the notarial acknowledgment to the said deed of conveyance is subject to the documentary stamp tax of fifteen pesos (P15.00) pursuant to Section 188 of the Tax Code of 1997. ADaSET In reply, please be informed of the following: 1. In BIR Ruling No. DA 247-2001 dated November 27, 2001, this Office opined that: "The MOA executed among Philrealty, Comunidades and each of the Investors described above is an agreement among the parties to construct and fund the cost of construction of a residential condominium project 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 MOA (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgement on the MOA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code. (BIR Ruling No. DA-015-99 dated January 11, 1999)" Moreover, Section 22(B) of the 1997 Tax Code, provides that: "(B) The term corporation shall include partnerships, 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. "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." (Emphasis ours.) Applying the foregoing precept, this Office hereby confirms your opinion that the Joint Venture or Co-Development and Construction Management Agreement between and among the Joint Owners consisting of CPI, MERIDIEN and Co-Development Partners is not subject to income tax as a separate corporation as it is not a taxable joint venture pursuant to Section 22(B) of the Tax Code of 1997. However, the notarial acknowledgement, on the said Agreement is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code. 2. In the above-stated Ruling, citing BIR Ruling No. DA 140-2000 dated March 8, 2000, this Office further opined that: "The contribution of land by Philrealty to the Project is likewise not subject to the 10% Vat because the transfer is not made in the course of business but only a capital contribution and that the same property being transferred to the Project is a capital asset." Thus, this Office confirms your opinion that the contribution of land by CPI to the project is not subject to the ten percent (10%) VAT because the transfer is not made in the course of business but only a capital contribution and that the same property being transferred to the project is a capital asset; 3. In the above-stated Ruling, citing BIR Ruling No. DA 324-2000 dated August 25, 2000, this Office also opined that: "The allocation and distribution of the completed condominium units and parking spaces and the issuance of the corresponding Condominium Certificates of Title by the Registry of Deeds of Taguig City the co-ventures in accordance with their respective equity contributions as stipulated in the MOA is not subject to income tax or withholding tax. . . . It is to be understood, however, that upon subsequent disposition by the parties under the MOA of the units allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax provided under the pertinent provision of the 1997 Tax Code and to the expanded withholding tax under Revenue Regulations No. 6-2001." This Office, therefore, confirms your opinion that the assignment and delivery of the developed units to each Joint Owner, as stipulated in the Agreement, is not a taxable event and not subject to income tax, withholding tax and VAT, considering that the same is not in connection with a sale, but merely a transaction to effect the return of their respective capital contribution to the joint venture; It is to be understood, however, that upon subsequent disposition by the parties under the Co-Development and Construction Management Agreement of the units allocated to them, the gain that may be realized by them from such sale will be subject to the regular income provided under the pertinent provision of the Tax Code of 1997 and to the expanded withholding. tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001; 4. BIR Ruling No. DA 247-2001 dated November 27, 2001 further clarified that: "Neither will the deed required to implement the allocation of the residential condominium units and parking spaces be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code since the allocation/distribution is without consideration, not in connection with a sale and constitutes mere return of capital. However, the acknowledgement to the deed implementing the said allocation is subject to the documentary stamp tax under Section 188 of the same Code." Hence, this Office confirms your opinion that the Agreement for the partitioning of units embodied in the Co-Development and Construction Management Agreement, whereby the Joint Owners will allocate to each other their respective shares in the developed Project is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 since the allocation is made without monetary consideration and is made to segregate their respective areas representing the return of capital which each has contributed. However, the acknowledgement to the said Agreement is subject to the documentary stamp tax under Section 188 of the same Code. 5. Again, in the said BIR ruling ( supra ) citing BIR Ruling No. DA-040-2001 dated March 20, 2001, this Office stated that: "The conveyance of the land and common areas of the Project in favor of the condominium corporation being without monetary consideration and is not in connection with a sale made to the condominium corporation, no income was generated and a fortiori , no income and/or creditable withholding tax is payable and collectible. Since the said conveyance is not a sale, it is likewise not subject to the 10% VAT imposes under Section 106 of the 1997 Tax Code, neither will it be subject to the documentary stamp on sales or conveyance of real property imposed under Section 196 of the same Code.However, the notarial acknowledgement to said deed of conveyance is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the 1997 Tax Code." AHSaTI For that reason, this Office confirms your opinion that the conveyance of the land and common areas of the Project in favor of the condominium corporation being without monetary consideration and is not in connection with a sale made to the condominium corporation, no income was generated and a fortiori , no income and/or creditable withholding tax is payable and collectible. Since the said conveyance is not a sale, it is likewise not subject to the ten percent (10%) VAT imposed under Section 106 of the Tax Code of 1997, neither will it be subject to the documentary stamp tax on sale or conveyance of real property imposed under Section 196 of the same Code.However, the notarial acknowledgment to the said deed of conveyance is subject to the documentary stamp tax of fifteen pesos (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.) JAMES H. ROLDAN Assistant Commissioner Legal Service