BIR Ruling [DA-364-00]

October 23, 2000 BIR RULING [DA-364-00] 22 (B), 27 (A), 196, 57 (B) DA-107-99 Guevarra & Gerodias Law Partnership 15th Floor, Strata 100 Bldg. Emerald Avenue, Ortigas CenterPasig City Attention: Atty. Raul G. Gerodias Gentlemen : This refers to your request for a confirmation of BIR Ruling No. 605-99 dated October 12, 1999 relative to the exemption granted by this Office on the Joint Venture entered into by your client, Ms. Maria Clara L. Lobregat (Lobregat), Lorenzo Enterprises, Inc. (LEI), Grand Metro Lorenzo Corporation (GMLC), Grand Metro Asia, Inc. (GMA) and Dahilayan Ventures, Inc. (DVI), wherein this Office rules that: (1) In accordance with Section 22(B) of the Tax Code of 1997 and Presidential Decree No. 929, the joint venture entered into by and between GMLC, LEI, Lobregat, GMA and DVI is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. (2) The allocation of the saleable area of the Project among GMLC, LEI, Lobregat, GMA and DVI in consideration of their respective contributions as stipulated in the Agreement is not subject to income tax or any withholding tax. Pursuant to Section 185 of the Revised Documentary Stamp Tax Regulations, the Partition Agreement to be executed by GMLC, LEI, Lobregat, GMA and DVI wherein they will allocate unto each other their shares in the saleable area in consideration of their respective contributions is not subject to the documentary stamp tax under Section 196 of the Tax Code of 1997, income tax and any withholding. (3) The acknowledgment to the Partition Agreement is subject to documentary tax under Section 188 of the Tax Code of 1997. (4) Upon the subsequent disposition by GMLC, LEI, Lobregat, GMA and DVI of the areas allocated to them, the gain that they may realize from such sale will be subject to the regular income tax rates under Sections 24 and 27(A) of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 6-85, as amended by Revenue Regulations 12-94 and Revenue Regulations No. 2-98. Such sale shall likewise be subject to the documentary stamp tax under Section 196 of the Tax Code of 1997 based on the gross selling price, fair market value or zonal value of the properties, whichever is higher. (5) The Deed of Conveyance that will be executed transferring to the condominium corporation the management of the common areas of the Project is not subject to creditable withholding tax pursuant to Section 57(B) in relation to Section 27 of the Tax Code of 1997. Neither is it subject to documentary stamp tax under Section 196 of the Tax Code of 1997 pursuant to Sections 185 of the Revised Documentary Stamp Tax Regulation. TaSEHC (6) The notarial acknowledgment to the Deed of Conveyance is subject to documentary stamp tax under Section 188 of the Tax Code of 1997. that subsequent to the issuance of the above ruling, an Amendment to Agreement dated May 8, 2000 was executed by and between GMLC, LEI, Lobregat, GMA and DVI, wherein they agreed on the following: "xxx xxx xxx "A. ASSIGNMENT OF RIGHTS AND ASSUMPTION OF OBLIGATIONS "1. Assignment . For valuable consideration, GMA and DVI hereby assign all their respective rights and obligations under the Agreement to GMLC. As a result of the assignment, GMLC shall succeed to and assume all the rights and privileges of both GMA and DVI under the Agreement, including, but not limited to, the right to receive and acquire ownership of specifically designated floors and/or units and parking spaces in the Building intended for GMA and DVI which are listed and described in Annexes I and J to the Agreement [Sec. 2(b)]. "2. Assumption of Obligations . As a result of the assignment, GMLC shall assume all obligations of GMA and DVI under the Agreement. With respect to GMA, these include, but not limited to, the obligations to: "a) act as Project Manager to oversee the conceptualization, development and construction, and marketing of the Building (Sec. 1) "b) contribute cash to defray the construction and development costs of the Project [Sec. 2]; and "c) contribute skills and expertise necessary for the construction and development of the Project [Sec. 2] With respect to DVI, these include, but are not limited to, the obligations referred to in subparagraphs (b) and (c) above. "B. CONSIDERATION FOR CONTRIBUTION OF LOBREGAT PROPERTY "LOBREGAT shall receive the following in exchange for her contribution of the LOBREGAT Property: "1. One (1) commercial unit in the Upper Ground Floor of the Building designated as Upper Ground E, with a floor area of Fifty square meters (50 sq. m.), more or less; "2. A total of Sixteen (16) residential units in the Fourteenth Floor of the Building designated as Units 1401, 1402, 1403, 1404, 1405, 1406, 1407, 1408, 1409, 1410, 1411, 1412, 1413, 1414, 1415 and 1416 with an aggregate floor area of Six Hundred Thirty-Eight and 30/100 square meters (638.30 sq.m.), more or less; "3. A total of Seven (7) residential units in the Nineteenth Floor of the Building designated as Units 1901, 1902, 1903, 1904, 1905, 1906 and 1907 with an aggregate floor area of Three Hundred Fifty-Nine and 1/100 square meters (359.01 sq. m.); and "4. A total of Eight (8) spaces of mechanical lift parking in the Fourth Floor designated as Mechanical Lift Car (MLC) Nos. 36, 37, 38, 39, 40, 41, 42 and 43. "C. AMENDMENTS "1. Substitution of GMLC for GMA and DVI. Upon execution of this Amendment, all references to GMA and DVI in Sections 1, 2(b), 4 and 5 of the Agreement shall be understood to be references to GMLC." "xxx xxx xxx" In connection therewith you now request for a confirmation of your opinion that the tax consequences of the Agreement as stated in BIR Ruling No. 605-99 dated October 12, 1999 remain the same, although some amendments thereto have been made. In reply, please be informed that due to some amendments in the agreement, the tax implications of the former Agreement are likewise modified. Notwithstanding, however, of the amendments mentioned above, the allocation of the saleable area of the project among Lobregat, LEI and GMLC in consideration of their respective contributions and the corresponding Partition Agreement to be executed by them are not subject to income tax, withholding and documentary stamp tax since such allocation/partition is still without consideration and constitutes mere return of capital. In the same manner, the transfer to the condominium corporation of the Properties and the common areas of the Project and the corresponding Deeds of Conveyances that will be executed are not subject to capital gains tax, withholding tax and documentary stamp tax since said transfer is still without consideration and not in connection with a sale made to the condominium corporation, the purpose thereof being limited to the management of the Project for the common benefit of the unit owners. After the partition, however, the gain that may be realized from the subsequent disposition by GMLC, LEI, and Lobregat of the areas allocated to them, will be subject to the regular income tax rates under Section 24 or 27(a) of the Tax Code of 1997, as the case may be, and to the creditable withholding tax under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94 and as last amended by Revenue Regulations No. 2-98; the receipts derived therefrom shall be subject to VAT and said transaction shall likewise be subject to the documentary stamp tax under Section 196 of the Tax Code of 1997 based on the gross selling price, fair market value or zonal value of the properties, whichever is higher. As to the assignment of GMA and DVI for valuable consideration, of all their respective rights and obligation under the Agreement to GMLC, the gain that they may realize from such assignment will be subject to the regular income tax rates under Section 24(A) 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, and/or any of the requirements imposed in this letter is not complied with, then this ruling shall be considered null and void. THCSEA Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group