BIR Ruling [DA-302-99]

May 18, 1999 BIR RULING [DA-302-99] SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati Attention: Atty. C.P. Noel Tax Division Gentlemen : This refers to your letter dated January 13, 1998 stating that your client, Philippine Securities Corporation ("PSC"), is the owner of two (2) parcels of land located at Ayala Avenue, Makati City; that PSC and Federal Homes, Inc. ("Federal") will enter into a Memorandum of Agreement ("MOA") whereby they will jointly participate in the construction of the multi-storey commercial/office condominium building ("Project") on the two (2) parcels of land owned by PSC; that the MOA provides for the following terms and conditions: 1. PSC will contribute to the construction project two parcels of land located at Ayala Avenue, Makati City; 2. Federal will contribute to the construction cash amounting to One Billion Pesos (P1,000,000,000.00). The cash will be used to defray the construction costs of the project. Construction expenses in excess of the P1 billion contributed by Federal will be shouldered by PSC; 3. PSC will be appointed as project coordinator for the construction project; 4. Upon completion of the condominium building and as a return of the contributions made by the parties to the construction project, specific whole floors and parking slots in the condominium building shall be allocated in the separate ownership between PSC and Federal in the proportion that their respective contributions bear to the total cost of the construction project; and 5. PSC and Federal will form a condominium corporation that will hold title to, manage, and maintain the land and the common areas pursuant to the provisions of R.A. 4726, otherwise known as the Condominium Act. For this purpose, PSC and Federal will transfer the land and the common areas to the condominium corporation, without any monetary consideration, by executing a Deed of Conveyance in favor of said corporation. Based on the foregoing, you now request for a ruling to confirm your opinion that: 1. The MOA to be executed by PSC and Federal for the construction of the condominium building, and the allocation of specifically designated whole floors or portions of floors and parking slots among the parties will not create a separate taxable entity within the meaning of Section 20(b), in relation to Section 24(a) of the Tax Code, as amended (now Section 22(B) of the Tax Code of 1997); 2. The above allocation to PSC and Federal will not result in any taxable gain subject to income tax and expanded withholding tax since the allocation is a mere return of the capital invested by the parties. The allocation of the condominium units in favor of PSC and Federal will also not be subject to documentary stamp tax since Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26) specifically provides that conveyances of realty not in connection with a sale, to trustees or other persons without consideration, are not taxable. However, the acknowledgment of the Deed of Conveyance will be subject to documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code, as amended; 3. In the event that PSC and Federal subsequently sell any of the floors or portions of the floors and parking slots designated to them to third parties, the gain that may be realized from such sale will be subject to the sliding corporate income tax rates under Section 27 of the Tax Reform Act of 1997 (Republic Act No. 8424), and to the creditable/expanded withholding tax under Revenue Regulations No. 6-85, as amended (now Revenue Regulations No. 2-98). The sale will also be subject to documentary stamp tax under Section 196 of the R.A. 8424. 4. The Deed of Conveyance that will be executed by PSC and Federal in order to convey the land and the common areas, without any monetary consideration, to the condominium corporation formed pursuant to the provisions of The Condominium Act will not result in any income tax, expanded withholding tax, and documentary stamp tax under Section 196 of R.A. 8424. 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 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. Thus, it is our opinion that the joint venture of PSC and Federal is not subject to the corporate income tax under Section 27 of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. TAaEIc Considering the foregoing, your opinion that: (1) the MOA to be executed by PSC and Federal for the construction of the Project and the allocation of specifically designated whole floors or portions of floors and parking slots in the Project among the parties will not create a separate taxable entity within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997; (2) the above allocation to PSC and Federal will not result in any taxable gain subject to income tax and expanded withholding tax since the allocation is a mere return of the capital invested by the parties; (3) in the event that PSC and Federal subsequently sell any of the floors or portions of floors and parking slots designated to them to third parties, the gain that may be realized from such sale will be subject to the sliding corporate income tax rates imposed under Section 27 of the Tax Code of 1997, and to the creditable /expanded withholding tax imposed under Revenue Regulations No. 2-98, and to the documentary stamp tax imposed under Section 196 of the same Tax Code are hereby confirmed. [BIR Ruling No. 317-92 dated October 28, 1992; BIR Ruling UN-203-95 dated June 2, 1995] The allocation/conveyance of the condominium units to PSC and Federal is not subject to income tax and to the expanded withholding tax since it is merely a return of their respective capital and is not in connection with any sales transaction. It is not also subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. However, the acknowledgment to said Deed of Conveyance is subject to DST of P15.00 pursuant to Section 188 of the same Tax Code. Furthermore, your opinion that the Deed of Conveyance to be executed by PSC and Federal conveying the land and the common areas, without any monetary consideration, to the condominium corporation formed pursuant to the provisions of the Condominium Act, will not result in any income tax, expanded withholding tax, and documentary stamp tax under Section 196 of the Tax Code of 1997, is also hereby confirmed. However, the acknowledgment to the Deed of Conveyance conveying the condominium units will be subject to DST of P15.00 pursuant to Section 188 of the Tax Code of 1997. [BIR Ruling No. 126-94 dated April 5, 1994; BIR Ruling UN-203-95 dated June 2, 1995] 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)