Grand Monaco Estate Developers, Inc.

April 26, 2007 BIR RULING [DA-264-07] 27 (A); DA-097-2001 Grand Monaco Estate Developers, Inc. No. 49, Sta. Ana St., near A. Tuazon Ave. San Roque, Marikina City Attention: Mr. Reynaldo A. Carpio President Gentlemen : This refers to your letter dated March 4, 2007 requesting for a ruling that (1) the joint development of a Townhouse Subdivision of Grand Monaco Estate Developers, Inc. (Monaco) and Ms. Linda Rebin, landowner, will not create a taxable joint venture within the meaning of Section 22 (B) in relation to Section 27 (A) of the National Internal Revenue Code of 1997 and (2) the allocation of their respective interests in the project and the execution of the Deed of Partition to implement such allocation, are not taxable events and are not subject to income/expanded withholding tax, value-added tax, capital gains tax, donor's tax and documentary stamp tax under Section 196 of the Tax Code. It is represented that Grand Monaco Estate Developers, Inc. is a corporation duly organized, operating and existing under the laws of the Republic of the Philippines with principal office address at No. 49, Sta. Ana Street, San Roque, Marikina City; that Monaco is engaged in the business of construction and real estate development; that Linda Rebin is the beneficial owner of an undivided parcel of land situated at lot 177C-2 Interior King Rudolf St., Kingspoint Subdivision, Bagbag, Quezon City; that the land is registered under the name of Octavio S. Maloles, with an area of four thousand three hundred forty six (4,346) square meters more particularly described under Transfer Certificate of Title No. 118122; that Monaco and Linda Rebin entered into a Memorandum of Agreement for a joint development of said townhouse subdivision; and that the parties agreed as follows: A. Responsibilities of the First Party: 1. The FIRST PARTY shall be responsible for the preparation of designs and plans of the subdivision and specification for the improvements and facilities duly signed and sealed by respective professionals and shall secure necessary approvals and permits from concerned authorities; 2. The FIRST PARTY agrees to undertake relocation survey, subdivision survey and putting lots monument, processing of segregating and titling of individual lots for all the lots subdivided as per approved plans; 3. The FIRST PARTY shall furnish at its expense all materials, labor, equipment, tools and engineering expertise for the land development aspect of the project such as the road network, waterlines, drainage lines, electrical lines, entrance gate, landscaping and beautification of the project site; 4. The FIRST PARTY commits to construct the Townhouse in mass or in cluster depending on the market situation but in any case the SECOND PARTY assigned units shall be delivered; 5. That the FIRST PARTY guarantees the completion of the projects within 3 years upon release of construction permit by the local building official. It is understood that the FIRST PARTY as the DEVELOPER shall extend its best effort to fully developed the property within the specified time. However, in the event of force majeure such as natural disaster, civil unrest, insurrections, general strikes, nationwide shortages of construction materials, runaway inflation (defined as an increase in the consumer price index by more than 15% per annum) and other legal impediment, the duration may be extended at a reasonable time to compensate whatever delays incurred subject to mutual arrangement by both parties; 6. The FIRST PARTY expressly warrants that all housing components it will construct for the project shall uniformly comply with generally accepted principles in engineering and construction and further warrants to secure all necessary certificates of completion or occupancy for all said units; 7. THAT, the responsibility of the FIRST PARTY is to complete the Townhouse units after which the maintenance of the project from the time of completion up to the time of turnover to the Homeowners/Association shall be covered by a management fund taken one (1%) percent from the proceeds of the sale. This fund is to be utilized to take case of the projects (Roads, Common Areas, Buildings and the Unsold Units) until turnover to the Homeowners/Association; 8. THAT, the FIRST PARTY holds the right to appoint the marketing group to market the resulting saleable townhouse units including the share of the SECOND PARTY subject to a fees of not more than 12% of the sales proceed, this fees shall be used to cover the cost of promotions, ads, flyers, open house activities, brokers commission and incentives and marketing management. AHDcCT B. Responsibilities of the Second Party: 1. THAT, the SECOND PARTY insure its valid and legal authority to enter into such agreement with the FIRST PARTY thru an irrevocable SPECIAL POWER OF ATTORNEY (SPA) duly signed by the registered lot owner; OCTAVIO S. MALOLES; 2. THAT the SECOND PARTY warrants the validity and legality of its title to the property, free from all liens, restrictions and encumbrances; 3. THAT the SECOND PARTY shall keep up to date the real estate taxes and all other taxes emanated from land ownership dues which shall be borne by the SECOND PARTY; 4. THAT the SECOND PARTY as being the beneficial owner, shall undertake to execute the required deed or such other deed or documents to register the title of the subject in their names or to the FIRST PARTY; 5. THAT the SECOND PARTY shall provide Road Right of Way to and from the public road to the aforesaid property and the right of way for the drainage line, water lines, electrical, telephone lines and to insure the perpetuity of the right of way leading to the subject property as being the only ingress/egress of the lot subject of this development, the SECOND PARTY must see to it that at all times this shall not be closed or made inoperable by other persons/whom might have claims and or otherwise shall be protected, depended and secured by the SECOND PARTY; 6. THAT the SECOND PARTY upon signing of this agreement shall not sell, encumber or otherwise dispose the subject property to other party without the knowledge and written consent of the DEVELOPER/FIRST PARTY; 7. THAT the SECOND PARTY shall make available to the FIRST PARTY the land to be developed free from any tenants and/or illegal occupants, and shall insure peaceful and continuous possession of the land to facilitate the development of the subdivision and to execute and deliver to the FIRST PARTY the necessary documents required to subdivide the land and eventual titling for each of the lot to be developed; 8. THAT the SECOND PARTY acknowledges the FIRST PARTY rights to protect its investment interest by putting a first lien to be annotated at the back of the Original titles, this agreement which shall be duly registered by the Registry of Deeds of Quezon City; C. Sharing The resulting saleable area in the subdivision shall be divided at the rate of seventy two percent (72%) for the FIRST PARTY and twenty eight percent (28%) for the SECOND PARTY in such manner as herein agreed upon: C.1 That the parties shall sit down and determine their respective unit shares guided by the principle of fair sharing; C.2 Titles to lots assigned to the FIRST PARTY shall be released pro-rata as per work accomplishment. For the purpose of determining the percentage accomplishment the FIRST PARTY shall present a standard guide to be mutually agreed upon; C.3 Upon the assignment of their lot share, all land taxes shall be paid by the parties based on their sharing ratio, each party shall also be responsible for the payment of appropriate income and other taxes on their share; C.4 Should there be expenses other than the FIRST PARTY financial obligation for erecting the Townhouse units, the FIRST PARTY may at its option/discretion extend assistance thru professional services and provide cash advances for the SECOND PARTY obligations of settling the mortgage account over the subject property, transfer of title and over things necessary to uphold this agreement, such expenses to be advanced by the FIRST PARTY shall be repaid by the SECOND PARTY thru assignment of proportionate share to the FIRST PARTY. In reply, please be informed that pursuant to Section 22 (B) of the Tax Code of 1997, 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. CSTDIE Such being the case, the Joint Venture of Monaco and Linda Rebin is not subject to the corporate income tax under Section 27 of the Tax Code of 1997. Consequently, gross payments received by said joint venture are not subject to the 2% expanded withholding tax prescribed under Section 57 (B) of the Tax Code of 1997 and implemented by Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 2-98. The allocation of saleable area of the project between Monaco and Linda Rebin in consideration of their respective contributions, as stipulated in the 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 rates under Sections 24 and 27(A) both of the Tax Code of 1997, as the case may be, and/or to the creditable withholding tax under Revenue Regulations No. 2-98, as amended. Furthermore, 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 property whichever is higher. Moreover, the said sale shall also be subject to value-added tax. The Partition Agreement whereby Monaco and Linda Rebin 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 acknowledgement on said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-097-2001 dated May 28, 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 the parcels of land, the Owner, neither sells, barters, exchanges goods, properties nor renders service to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) ACIEaH 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, this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service