BIR Ruling [DA-311-99]

May 20, 1999 BIR RULING [DA-311-99] Atty. Carlos D. Cinco Rm. 1402-A, Ayala Avenue Condominium 6776 Ayala Avenue Makati City S i r : This refers to your letter dated November 17, 1997 requesting on behalf of your clients, KSY Land Development Corporation (the "Developer) and Mamerto Jacinto, Jr. & Co . (the "Landowner"), for a confirmation of your opinion on the tax implications of your clients' Joint Venture Agreement (JVA). It is represented that 1. The Developer and the Landowner entered into a JVA for the development and construction of a luxurious 35-storey condotel-commercial residential condominium building with a health club (the "Project") on Yakal Street, Makati City; 2. The Landowner will contribute its two (2) parcels of land situated on Yakal St., Makati City, with a total area of 1,434 square meters, more or less, free from any and all liens or encumbrances, as the site of the Project, while the Developer will contribute all costs and the skills necessary for the development and construction of the Project; 3. In return for their respective contributions to the Project, the Landowner and the Developer will each acquire separate ownership of specifically designated condominium units and parking slots in the Project; that the Landowner shall have twenty one percent (21%) of the saleable/rentable area of the Project, and the balance of seventy nine percent (79%) shall go to the Developer; 4. The Developer shall have the option to build over and beyond the 35 storeys the units of which shall not form part of the saleable/rentable area for purposes of computing the Landowner's 21% share; that should the Developer build additional storeys, the Landowner shall be entitled to ten percent (10%) of the saleable/rentable area of the first five (5) additional storeys to be determined by lottery, but shall not be entitled to any share in the succeeding additional storeys; 5. The project will be constituted into a condominium Project under the Condominium Act (Republic Act 4726, as amended); and a condominium corporation will be formed to hold title to the land and the common areas of the Project; 6. For the purpose of allocating to the Developer its 79% share, and to the Landowner its 21% share of the condominium units and parking slots in the Project, a Deed of Partition will be executed by the Landowner and the Developer immediately after the building plans and Master Deed with Restrictions are approved by the government agencies concerned, whereby the parties adjudicate unto themselves full and exclusive title over the units and parking lots in the Project; the allocation is a mere return of the capital that each party has contributed to the Project; 7. In accordance with the provisions of the Condominium Act, the Landowner will execute a Deed of Conveyance, whereby the Landowner will transfer, without monetary consideration, to the condominium corporation the titles to the land and the common areas in the Project; 8. No profits will be shared by the parties because once the development and construction of the Project is completed, the cooperative relationship between the parties will cease, since each party shall take separate ownership of the units and parking slots; Each party will then be free to sell its share of the units and parking slots to third parties at prices no lower than those of the Developer; and 9. The Landowner shall cause the annotation of the JVA at the back of the Transfer Certificates of Title of the land. Based on the foregoing, you would like to request for an opinion of the following: 1. Whether or not the JVA executed by the Developer and the Landowner for the construction of the Project, and the allocation of their specific shares of the condominium units and parking slots in the Project is not a taxable joint venture within the meaning of Sec. 20(b), in relation to Sec. 24(a) of the Tax Code. 2. Whether or not the allocation between the Developer and Landowner of the condominium units and parking slots in consideration of their contributions to the project, as stated in the JVA, is not a taxable event and is not subject to income/withholding tax, because the allocation is a mere return of the capital that each has contributed to the Project; 3. Whether or not the Deed of Partition whereby the Developer and the Landowner will allocate unto themselves their shares in the condominium units and parking slots in the Project, is also not subject to documentary stamp tax imposed under Sec. 196 of the Tax Code, because the allocation is made without monetary consideration and is not in connection with a sale. Instead, the partition is made merely to segregate the condominium units and parking slots between the Developer and the Landowner, as the return of capital which each contributed to the Project; and 4. Whether or not the Deed of Conveyance to be executed by the Landowner to convey the land without monetary consideration to the condominium corporation to be formed pursuant to the Condominium Act will not be subject to income tax, expanded withholding tax and documentary stamp tax. 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. cSIACD Such being the case, it is our opinion that the joint venture of KSY Land Development Corporation and Mamerto Jacinto, Jr. & Co for the construction and development of a luxurious 35-storey condotel-commercial residential condominium building with a health club is not subject to the corporate income tax under Sec. 27(A) 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. Considering the foregoing, the joint venture of KSY Land Development Corporation and Mamerto Jacinto, Jr. & Co for the construction and development of the Project will not create a taxable joint venture within the meaning of Sec. 22(B), in relation to Sec. 27(A) of the Tax Code of 1997; and that the allocation of their specific floors or units therein and parking slots in the Project in consideration of their contribution in the Project, as stipulated in the Memorandum of Agreement, and the issuance of the corresponding condominium Certificate of Title by the Registry of Deeds of Makati City to KSY Land Development Corporation and Mamerto Jacinto, Jr. & Co., representing their respective shares or participating interests in the Project as stipulated in the MOA are not taxable events. The same is therefore, not subject to income and/or expanded withholding tax because it is only upon sale or disposition of the units allocated to the KSY Land Development Corporation and Mamerto Jacinto, Jr. & Co. to third parties that the gain realized by the parties in the said transaction will be subject to the regular 35% (now 33%) income tax under Sec. 27(A) of the Tax Code of 1997 and to the expanded withholding tax under Revenue Regulations No. 2-98. The transfer of the said properties to third parties shall likewise be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the consideration or the fair market value of the property being transferred, whichever is higher. Moreover, Section 185 of the Revised Documentary Stamp Tax (DST) Regulations No. 26 provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Accordingly, since the aforementioned Deed of Partition and Deed of Conveyance are without consideration and are not in connection with a sale made to KSY Land Development Corporation or Mamerto Jacinto, Jr. & Co. and the condominium corporation, respectively, no income was generated and a fortiori , no creditable EWT and DST are payable and collectible. However, the acknowledgment to said Deed of Partition and Deed of Conveyance are subject to DST of P15.00 pursuant to Section 188 of the Tax Code of 1997. In view thereof, the Deed of Partition whereby KSY Land Development Corporation and Mamerto Jacinto, Jr. & Co. allocate unto each other their respective shares in the floors or units and parking slots in the Project, in consideration of their respective contributions in the Project, and the Deed of Conveyance to be executed by Mamerto Jacinto, Jr. & Co. to convey the land to a condominium corporation and pursuant to the Condominium Act, considering that both are without monetary consideration, will not be subject to income tax, EWT and DST under Section 196 of the Tax Code of 1997. aCTADI 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, and/or any of the requirements set forth in this letter are not complied with, then this ruling shall be considered null and void. (BIR Ruling No. DA-065-97 dated February 10, 1997) Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)