BIR Ruling [DA-268-05]

June 21, 2005 BIR RULING [DA-268-05] S.22 (B); DA-056-03/2-24-03 Atty. Raymundo A. Quiroz Unit 11, Star Arcade, C. V. Star Avenue, Las Pias Dear Atty. Quiroz, This refers to your letter dated May 3, 2005 requesting on behalf of your client, Winville Development Corporation (Winville for brevity) for an opinion on the tax consequences on the development of condominium projects which it has conceptualized. The facts, as you represent, are as follows: Winville has arranged, organized, and coordinated with investors (hereinafter referred to as the Investors) who are willing to contribute their financial resources to the realization of the project, a residential condominium project (hereinafter referred to as the Project). The result is a collective development by the Investors of the Project, as pro-rata, pro-indiviso owners thereof, whereby the individual units of the condominium which will comprise the projects shall eventually be owned by the Investors as return of their investments. The scheme is more particularly described herein below. Because there was a need to ensure the acquisition of the parcel of land (hereinafter referred to as the Subject Land) on which the Project is to be undertaken in order to make certain the conceptualization and realization of the project, Winville had secured a loan with Allied Banking Corporation (the Bank for brevity) to finance the purchase of the Subject Land for and in behalf of the Land Investors and, subsequently, the Building Investors. The Land Investors and the Building Investors will put up their respective capital contributions in order to pay the Purchase Price of Subject Land and/or defray the cost for the development and completion of the condominium building (hereinafter referred to as the Building) forming part of the Project. Particularly, the capital contribution of each of the Investors (the Investor's Capital Contribution for brevity) shall be used to pay the Purchase Price of Subject of Land and/or defray the costs of the development and completion of the Subject Unit and the Parking Unit, in the appropriate case. The Investor's Capital Contribution of the Land Investors will be applied to the payment of the loan secured by Winville to purchase the Subject Land, inclusive of interests and cost, constituting the Purchase Price of Subject Land but subject to the Professional fee and other amounts due under the Memorandum of Agreement (MOA for brevity). Consequently, the Subject Land will be placed in the name of the Bank which will also act as Trustee with Winville as the Trustor and the Investors as beneficiaries of the Trust pursuant to a Trust Agreement that was executed between the Bank and Winville. In the event, however, that after the Investor's Capital Contribution of the Land Investors are applied to the Purchase Price of Subject land, the Professional Fee and the other amounts due under the MOA, and a part of the Purchase Price of Subject Land remains unpaid, portions of the Investor's Capital Contribution of the Building Investors shall be applied thereto. And any excess of the Investor's Capital Contribution of the Land Investors after they applied to the Purchase Price of the Subject Land and the Professional Fee and other amounts due under the MOA; shall be applied to the construction of the Building. These notwithstanding, however, for the orderly, judicious and expeditious management of the development of the Project, Winville shall have the exclusive discretion as to what expenses and the amount due under the MOA that the Investor's Capital Contribution of the Investors should be applied. The Subject Land is described as Block 9 Lot 3, located at E Square Crescent West District, Bonifacio Global City, Taguig City containing an area of 2,052 square meters, more or less. Winville shall execute or cause the timely execution of the Master Deed particularly describing, among others, the Subject Units, the Parking Units and the Common Areas of the Project and providing, among others, for the establishment of the Condominium Corporation pursuant to the provisions of the Condominium Act and of the Corporation Code for the purpose of holding title to all the Common Areas in the Project. The Master Deed shall be annotated at the back of the title covering the Subject Land. To begin the Project, each Investor will enter into a Memorandum of Agreement with Winville. The Investor will also execute an Escrow Agreement with the Bank as the escrow agent (hereinafter referred to as the Escrow Agent) requiring for the establishment of a trust fund (hereinafter referred to as the Trust Fund) where the Investor's Capital Contribution will be remitted and disbursed pursuant to the terms of the MOA. The target commencement date or the date which the actual implementation of the Project is calculated to commence shall be on March 31, 2006 or any other date to be determined by Winville. In the meantime, Winville will arrange, gather, organize, and coordinate with Investors to determine the feasibility of proceeding with the Project, as it will only be after Winville has organized and gathered at a sufficient number of the prospective investors that it will be feasible to commence the Project. For whatever reason that it may deem proper but prior to the commencement and implementation of the Project, Winville may terminate the MOA by advance written notice to the Investors. In such case, Investor's Capital Contribution remittances, which have been deposited in the Trust Fund, shall be returned to the Investors, together with all interests which in the meantime have accrued thereon. In such event, the Trust covering the Subject Land shall be terminated and the Subject Land shall revert to Winville in consideration for the loan that it secured to pay the purchase price of the Subject Land. Prior to the actual division of the Project into individual condominium units and the conveyance of the corresponding condominium certificates of title covering the Subject Units and the Parking Units to the Investors, their interests in the Project consist in a pro-indiviso, pro-rata share on the Subject land and the Building, held collectively. As project arranger, Winville shall do the following acts on behalf and for the collective benefit of the Investors and in furtherance of the collective development of the Project: a. To prequalify and select architects, construction management engineers, quantity surveyors, general building contractor, specialty engineering contractors and in general, to act as overall arranger, coordinator organizer of the Project; b. During the initial stages of the Project, and all throughout the construction period, to set up and implement, in coordination with the Escrow Agent, a system for the billing collection of any and all amounts required from the Investors, including without limitation, the Investor's Capital Contribution. c. To do such other acts as may be necessary and desirable for the development of the Project. In order to effectively carry out its mandate, the Investors have empowered Winville to do such acts as may be necessary to implement the Project with full power and authority to do and perform every act and thing whatsoever requisite and necessary to be done in and about the premises. As project arranger, Winville shall be paid a Professional Fee equivalent to Four Percent (4%) of the Investor's Capital Contribution. And, if deemed necessary by Winville to obtain the number of Investors needed to complete the Project, Winville shall have the right but shall not be obligated to participate in the collective development of the Project as an investor. The Professional Fee shall be paid by the Escrow Agent to Winville for and on behalf of the Investor from time to time which may be on a monthly progress billing, as Winville may determine and direct, in proportion to the percentage of actual completion of the Project and in accordance with the general rules of disbursement of necessary payments. The Escrow Agent shall also approve all disbursements from the Trust Fund for the Project for the account of the Investor based on the recommendation and certification of Winville, provided, that Winville shall submit photocopies of the relevant source documents for the disbursement. The Investor's Capital Contribution is a guaranteed maximum. But any remaining balance of the Trust Fund upon: (i) the Acceptance and Turnover of the Subject Unit and Parking Unit, in the appropriate case, and (ii) the conveyance by the Trustee of the common areas of the Project to the Condominium Corporation, shall be awarded to Winville. Upon the completion of the Project, the Investor's interest in the Project, consisting of pro-indiviso, pro-rata shares on the Subject Land and the Building, held collectively, shall be partitioned among them and the Trustee shall cause to be issued the condominium certificates of titles to the Investors corresponding to the particular Subject Units and the Parking Units that they had invested into constituting returns of their investments. On the other hand, the titles covering the common areas of the Project, including the Subject Land, shall be transferred in the name of the Condominium Corporation of which the Investors, as owners of the Subject Units and parking, shall automatically become members. The power and authority granted to Winville shall terminate upon the Acceptance and Turnover of the Subject Units and the Parking Units, in the appropriate case, by the Investors and the conveyance of the common areas of the Project to the Condominium Corporation. Acceptance and Turnover shall mean that point in time when the Project is conclusively deemed completed though the joint certification of Winville and the Construction Manager. Upon Acceptance and Turnover and the Escrow Agent's certification of full payment by the Investor of all amounts provided in the MOA, the Subject Unit and the Parking Unit, in the appropriate case, shall be conveyed by the Trustee to the Investor and the MOA shall be considered terminated. Winville has the right to rescind, terminate or cancel the MOA, without need of judicial action, in case any one of the events of default stipulated thereunder, and the Investor fails to remedy or cure to the satisfaction of Winville such default, within five (5) days from receipt of written notice from Winville of the occurrence of such default. Upon such termination, Winville shall have the right to take over and acquire or identify another investor to take over and acquire whatever rights and interests of the defaulting Investor on the Subject Unit and the Parking Unit and become an Investor thereof in lieu but independently of the defaulting Investor. Based on foregoing, you now request for a confirmation that: 1. The transfer of the title covering the Subject Land to the Bank, as trustee, with Winville as the Trustor and the Investors as beneficiaries is not subject to any tax imposed under the Tax Code, including Value Added Tax (VAT for brevity) and the documentary stamp on deeds of sale and conveyance of real property imposed under Section 196 of the Tax Code of 1997 and other related laws and regulations other than those already paid to the vendor by Winville as the Trustor for the benefit of the Investors. cHAaCE 2. The conveyance of the Subject Units and Parking Units, pursuant to the Trust Agreement and the MOA, by the Trustee to the Investors, who are pro-rata, pro-indiviso owners of the Subject Land and the building, is not subject to any tax imposed under the Tax Code, including VAT, and the documentary stamp on deeds of sale and conveyance of real property imposed under section 196 of the Tax Code of 1997 and other related laws and regulations. 3. The conveyance of the common areas of the Project, including the Subject Land, by the Trustee to the Condominium Corporation is not subject to any tax imposed under the Tax Code, including VAT, and the documentary stamp of sale and conveyance of real property imposed under Section 196 of the Tax Code of 1997 and other related laws and regulations. In reply, please be informed of the following: 1. The transfer of the title covering the Subject Land to the Bank as the Trustee with Winville as the Trustor and the Investors as beneficiaries is not subject to any tax imposed under the Tax Code of 1997 and the documentary stamp on deeds of sale and conveyance of real property imposed under Section 196 of the Tax Code of 1997 and other related laws and regulations other than those already paid to the vendor by Winville as the Trustor for the benefit of the Investor. The reason is that the Trustee is not holding title on its own behalf but only as trustee for Winville as the trustor and the Investor as beneficiaries. Such transfer thereof is not a taxable event as the appropriate taxes had already been paid to the vendor. However, the notarial acknowledgement is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the 1997 Tax Code. ( BIR Ruling No. DA 039-91 dated April 3, 1997 ) 2. The conveyance of the Subject Units and parking Units by the Trustee to the Investors does not have the effect of a sale exchange or disposition, nor does it vest title on the real properties as the Investors retain beneficial ownership over the said properties that would give rise to a taxable event. Moreover, the transfer is without monetary consideration and the Trustee merely holds legal title to the Subject Units and Parking Units. Accordingly, the conveyance of the subject Units and Parking Units is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 but only to the documentary stamp tax of P15.00 provided in Section 18 of the same Code. ( BIR Ruling No. DA-056-2003 dated February 24, 2003 ). Moreover, the conveyance resulted merely from a partition of the Investors' pro-indiviso, pro-rata shares on the Subject Land and the Building constituting a return of the investment that they had made thereon ( BIR Ruling No. DA-240-2001 dated November 16, 2001 ). This being so, the conveyance is likewise not subject VAT. 3. The conveyance of the common areas of the Project, including the Subject Land, by the Trustee in favor of the Condominium Corporation being without monetary consideration and 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 imposed under Section 106 of the Tax Code of 1997, neither will it be subject to the documentary stamp tax on sale or conveyance is subject 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 Tax Code of 1997. ( BIR Ruling No. DA040-2001 dated March 20, 2001 ). AECacT It is to be understood, however, that upon the subsequent disposition by the Investors of the Subject Units and the Parking Units allocated to them, the gain that may be realized by them from such disposition shall be subject to such capital gains taxes and/or such other taxes as may be imposed upon similar ordinary dispositions of real estate properties. 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 void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service