BIR Ruling [DA-320-05]

July 18, 2005 BIR RULING [DA-320-05] 22 (B); DA-303-2005 Filinvest Land Incorporated 173 P. Gomez St., San Juan Metro Manila Attention: Atty. Andrew James Gerard Dulay Ruiz Tax Counsel Gentlemen : This refers to your letter dated March 8, 2005 requesting for confirmation of your opinion that: 1. The Development Agreement between FLI and URRDC, for the subdivision and horizontal development of the abovementioned real property located in Barangay Colaique, City of Antipolo, Province of Rizal, into a residential subdivision, will not give rise to a taxable joint venture as provided under Section 22(B), in relation to Section 27(A), both of the National Internal Revenue Code (NIRC), as amended; 2. The allocation of saleable lots between FLI and URRDC in consideration of their respective contributions, as stipulated in the Development Agreement, is not a taxable event and is not subject to income tax, and subsequently withholding tax, and the Value-Added Tax (VAT), since the allocation of saleable lots is in fact a mere return of capital that each has contributed; 3. The Partition Agreement whereby FLI and URRDC allocated unto each other their share in the saleable lots in consideration of their respective contributions, is not subject to the Documentary Stamp Tax (DST) imposed under Section 196 of the NIRC, as amended, nor to any income tax, and consequently withholding tax, since the allocation is made without monetary consideration and is not in connection with a sale. Rather, the partition is made merely to segregate the saleable lots between the parties, as the return of the capital which each contributed. However, it is understood that should FLI and/or URRDC sell any of the saleable lots allocated to them, to third parties, the gain that may be realized from said sale will be subject to regular (corporate) income tax at 32%, in accordance with Section 24 of the NIRC, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. aTCADc The facts, as represented are is follows: Filinvest Land, Inc. ("FLI" for brevity) is a corporation duly organized and existing under the laws of the Republic of the Philippines, engaged in the business of acquiring, developing and selling real estate, including residential subdivisions. The United Resources Realty and Development Corporation ("URRDC" for brevity) is the absolute and registered owner in fee simple of a parcel of land, covered by Transfer Certificate of Title (TCT) No. R-7180 (transfer from TCT No. 198428/T-990). Said real property, with an area of 18,900 square meters (m 2 ), is located in Barangay Colaique, City of Antipolo, Province of Rizal. On October 26, 1989, Filinvest Development Corporation ("FDC" for brevity), as the developer, entered into a Development Agreement with URRDC for the subdivision and horizontal development of 475,656 m 2 of real property, including the parcel of land abovementioned. The salient portions of the Development Agreement are as follows: 1. FDC shall undertake the subdivision and horizontal development of the subject real property, to be identified as the "Sta. Cecilia Subdivision Project", a residential project, which development shall include improvements and facilities as agreed upon; 2. FDC shall shoulder all the equipment, engineering, and labor expenses incurred relative to the subdivision and horizontal development of the Sta. Cecilia Subdivision Project; 3. For and in consideration of the development obligations and undertakings it will assume, FDC will receive Sixty percent (60%) of the saleable lots which shall result from said subdivision and horizontal development. The remaining Forty percent (40%) shall be retained in ownership by URRDC; and 4. Upon determination of the saleable lots which would be assigned respectively to FDC and URRDC, FDC and said URRDC will execute a Deed of Allocation to allow the lots pertaining to both FDC and URRDC may be registered in their respective names. The said Joint Venture Agreement was amended on January 14, 2002, further defining the areas to be subject to development. Subsequently, FDC assigned its rights and obligations as developer of the Sta. Cecilia Subdivision Project to FLI. On February 3, 2005, FLI and URRDC entered into Partition Agreement, whereby the developed saleable lots were allocated between FLI and URRDC, based on the terms of the Development Agreement. The said documents adjudicated the said saleable lots between the parties, as part of their respective shares in the Sta. Cecilia Subdivision Project, to allow the registration of said allocated saleable lots in their respective names. In reply, please be informed of the following: 1. The Development Agreement executed between FLI and URRDC described above is an agreement between the parties for the subdivision and horizontal development of a parcel of land into a residential subdivision 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 Development Agreement (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the MOA is subject to the DST on certification pursuant to Section 188, of the 1997 Tax Code. ( BIR Ruling No. DA-303-2005 dated July 5, 2005 ) DHEaTS Section 22(B) of the 1997 Tax Code, provides: "(B) 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. "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." From the foregoing definition of a corporation, we confirm your opinion that the Development Agreement executed between the parties does not give rise to a taxable joint venture. The parties to a joint venture agreement may file separate income tax returns for their net revenue for the above-mentioned project less their respective proportionate share in the joint venture expenses since the joint venture is not embraced within the meaning of the term "corporation", hence, not subject to the corporate income tax imposed under Section 27(A) of the 1997 Tax Code. ( BIR Ruling No. 002-97 dated January 14, 1997 ) 2. The allocation and distribution of the saleable lots to FLI and URRDC in accordance with their respective equity contributions as stipulated in the Development Agreement is not subject to income tax, withholding tax or capital gains tax, since the allocation/distribution is without consideration, not in connection with a sale and constitutes mere return of capital. Likewise, the said allocation and distribution is not subject to DST for want of consideration. It is to be understood, however, that upon subsequent disposition by the parties under the Development Agreement of the individual/subdivided lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rate provided under Section 27(A) of the 1997 Tax Code, capital gains tax imposed under Section 24(D) of the same Code, and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code based on the gross selling price or fair market value of the properties whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. ( BIR Ruling No. DA-262-2001 dated December 18, 2001 ) 3. The Partition Agreement whereby FLI and URRDC have allocated unto each other their share in the saleable lots in consideration of their respective contributions, are not subject to the DST imposed under Section 196 of the NIRC, as amended, considering that the allocation is made without monetary consideration and is not in connection with a sale. In this regard, Section 185 of the Revised Documentary Stamp Tax Regulations (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 Partition Agreement was executed without consideration and were not in connection with a sale between FLI and URRDC, no DST is due and collectible on said Partition Agreement. However, we understand that the notarial acknowledgments to said Partition Agreement shall be subject to the DST pursuant to Section 188 of the NIRC, as amended, in the amount of P15.00. 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. EIDATc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service