BIR Ruling [DA-327-99]

May 31, 1999 BIR RULING [DA-327-99] Clarence D. Guerrero Law Office 10/F TMBC Building 6772 Ayala Avenue Makati City Attention: Atty . Clarence D . Guerrero Gentlemen : This refers to your letter dated April 13, 1999 stating that your client, Baguio Properties, Inc., is the owner of several properties located in Baguio City with an aggregate area of 96.9102 has. and Tuba, Benguet, with an aggregate area of 120.7695 has. more or less; that sometime in April 1995, Baguio Properties, Inc. and Sta. Lucia Realty and Development, Inc. entered into a Joint Venture Agreement for the development of the said parcels of land into a residential estate with a golf club, and a portion of the area to be developed into golf villas and hotel; and that the salient features stipulated on the agreement includes the following: "1. The Developer will shoulder the cost to develop the land. "2. The parties will agree on a partition of subdivision lots on a 60 - 40 basis in favor of the Developer, part of which shall be registered in the name of the Developer as its developer's fee, while the remaining lots shall be titled in the name of the Landowner. "3. For the area allocated for the golf villas and hotel, the parties agree to annotate their respective ownership, in the sense, that the developer shall own 60%, while the remaining 40% shall be in the name of the Landowner. "4. The area allocated for the golf course shall remain in the name of the Landowner, which will eventually be transferred in the name of the Golf Club, which shall be formed by the parties of the joint venture. "5. In an amendment to the joint venture agreement, the golf club that shall be formed shall have 5 golf courses in 5 different locations, each golf course per 18 hole, shall be allocated 1,500 golf shares. However, there are several landowners of the golf areas, which are also under a joint venture with the developer. For this project, 1,500 golf shares shall be issued for the Baguio golf project, wherein 60% shall be issued in the name of the Developer and 40% in the name of the Landowner. "6. Both parties shall at all times maintain separate individual resources and properties contributed in undertaking the said project. "7. Both parties agree to sell their respective share of subdivision lots and golf shares separately and shall shoulder the corresponding taxes inherent in all sales. "8. Both parties shall keep and maintain separate books of account for each party to monitor their cost and expenses in the project." Based on the foregoing, you now in effect request for a ruling on the tax consequence in carrying out the provisions of the Joint Venture Agreement. In reply, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, the term "corporation" includes 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. Thus, it is our opinion that the joint venture of Baguio Properties, Inc. and Sta. Lucia Realty and Development, Inc. 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. Considering the foregoing, the Joint Venture Agreement executed by Baguio Properties, Inc. and Sta. Lucia Realty and Development, Inc. for the development of the aforementioned parcels of land into a residential estate with a golf club, and a portion of the area to be developed into golf villas and hotel, and the allocation of their specific portions will not give rise to a separate taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997, and that the allocation between Baguio Properties, Inc. and Sta. Lucia Realty and Development, Inc. in consideration of their contribution in the project, as stipulated in the Joint Venture Agreement, is not a taxable event and is not subject to income/expanded withholding tax, because the allocation is a mere return of the capital that each has contributed to the project. However, should Baguio Properties, Inc. and Sta. Lucia Realty and Development, Inc. sell any of the shares allocated to them to third parties, the gain that may be realized by Baguio Properties, Inc. and Sta. Lucia Realty and Development, Inc. from such sale will be subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997, and to the creditable/expanded withholding tax under Revenue Regulations 2-98, as amended. (BIR Rulings No. 274-992 dated September 30, 1992 and UN-025-95 dated January 11, 1995) and the transfer shall be subject to the documentary stamp tax imposed under Section 196 of the same Code, based on the consideration or the fair market value of the property whichever is higher. Moreover, 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, the Joint Venture Agreement executed between the parties are without consideration and are not in connection with a sale made to Baguio Properties, Inc. and Sta. Lucia Realty and Development, Inc., respectively, no income will be generated and a fortiori , no creditable/expanded withholding and documentary stamp taxes are payable and collectible. However, the acknowledgments to said Partition Agreement and Assignment of Land Titles to Condominium Corporation are subject to the documentary stamp tax of P15.00 each pursuant to Section 188 of the Tax Code of 1997. Likewise, the Partition/Sharing Agreement to be executed by Baguio Properties, Inc. and Sta. Lucia Realty and Development, Inc., whereby the parties shall effect transfer title in their respective names in accordance with the agreed allocation of their respective shares in the project, in consideration of their respective contributions in the project is without consideration, the same will not be subject to income, creditable/expanded withholding and documentary stamp taxes under Section 196 of the Tax Code of 1997. (BIR Ruling No. 207-92 dated July 16, 1992, 349-93 dated July 30, 1993 and UN-025-95 dated January, 11, 1995) Furthermore, the transfer of the land allocated for the golf course to the golf club in exchange for club shares by Baguio Properties, Inc. and Sta. Lucia Realty and Development, Inc., of which they as a consequence will own in part, is not subject to any income, capital gains tax and documentary stamp tax. 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 and Enforcement Group)