BIR Ruling [DA-328-99]

May 31, 1999 BIR RULING [DA-328-99] Swire Realty Development Corporation Swire Corporate Center #44 N. Domingo Street Quezon City Attention: Mr . Jaime V. Guerrero, Jr . President Gentlemen : This refers to your letter dated November 6, 1998 requesting for a ruling on the tax implications of your joint venture undertaking with Golden Age Landholding, Inc. to construct a condominium building on the parcels of land owned by Golden Age Landholding, Inc. It is represented that you and the Golden Age Landholding, Inc. are domestic corporations duly registered with the Securities and Exchange Commission (SEC); that on September 15, 1994, you entered into a Joint Venture Agreement as developer with the Golden Age Landholding, Inc. for the establishment of a commercial/residential Condominium Project over the properties of the Golden Age Landholding, Inc., which properties are covered by TCT Nos. 174878, 174879, 174880, and 174881 and all situated at cor. Burgos and Caceres Streets, Makati City; that in the joint venture agreement you undertake, among other things, to construct a commercial/residential condominium and to exclusively manage and supervise the construction of the condominium; that you also undertake to finance all the costs of construction including the cost of building materials, supplies, equipment, tools, labor and services of technical personnel expenses of securing the necessary permits, licenses, performance and other bonds, expenses for the preparation of the necessary schematic designs, detailed plans and specifications and generally all expenses necessary to complete the condominium project; that upon completion of the condominium project, the Golden Age Landholding, Inc. shall be entitled to 19% of the gross floor area and the remaining 81% shall pertain to the developer as its share; that the allocation of the corresponding condominium units shall be in accordance with the mutual agreement of the parties to the Joint Venture; and that the issues to be resolved by this Bureau are as follows: 1. that the Joint Venture Agreement you entered into as developer with the Golden Age Landholding Inc. for the construction of a condominium building, will not create 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 2. that the allocation of the units and the issuance of the corresponding Condominium Certificate of Title by the Registry of Deeds of Makati City in your name and the Golden Age Landholding, Inc., representing your respective shares or participating interests in the project as stipulated in the MOA are not taxable events, therefore, not subject to income and/or expanded withholding tax, because it is only upon sale or disposition of the units allocated to you and the Golden Age Landholding, Inc. to third parties that the gain realized by the parties in the said transaction will be subject to the regular 35% income tax under Section 27(A) of the Tax Code of 1997 and to the expanded withholding tax under Revenue Regulations No. 6-85, as amended. DEIHSa In reply, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, the term corporation includes partnership, 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. It is to be emphasized, however, that P.D. No. 929 amended the definition of taxable corporation as not to include joint venture formed for the purpose of undertaking construction projects. The reasons for such amendment are: (1) Local contractors contribute substantially to the development program of the country; (2) Local contractors are at a disadvantage in competitive bidding with foreign contractors in view of limited capital and financial resources; (3) In order to be able to compete with big foreign contractors, it may be necessary for them to enter into joint ventures to pool, their limited resources in undertaking big construction projects; and (4) To assist them in achieving competitiveness with foreign contractors, the joint ventures formed by them should not be considered an additional income tax lien. Considering that it is the intention of the legislature to exclude joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, this Office is of the opinion as it hereby holds that the Joint Venture Agreement you entered into with Golden Age Landholding, Inc. is not subject to the regular income tax under Section 27(A) of the Tax Code of 1997. Moreover, the allocation of saleable lots between you and the Golden Age Landholding, Inc. in consideration of your respective contributions, as stipulated in the Joint Venture Agreement is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. However, upon the subsequent disposition by the co-venturers of the lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax under Section 27(A) of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 2-98. (BIR Ruling No. DA286-98 dated June 29, 1998) The said sale shall likewise be subject to the documentary stamp tax imposed under Sec. 196 of the Tax Code of 1997. 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)