Landmark Communities, Inc.

July 13, 2007 BIR RULING [DA-382-07] 22 (B) DA-047-2004 Landmark Communities, Inc . 3rd Floor PGMC Building No. 76 Calbayog corner Libertad Street Mandaluyong City Attention: Ms. Rowelyn Merencillo Finance Manager Gentlemen : This refers to your letter dated March 6, 2007 requesting for a ruling relative to the Joint Venture Contract entered into by and between Lima Land, Inc. (Landowner) and Landmark Communities, Inc. (Developer) Documents submitted disclosed that Landowner is the absolute and beneficial owner of a certain real estate properties located in Barangay Bugtong na Pulo, Lipa City, consisting of approximately 190,100 square meters, more or less; that Landowner agrees to enter and subject the said property to a Joint Development Memorandum of Agreement with the Developer; that the property shall be developed by the Developer into a planned socialized and low-cost housing development in accordance with Batas Pambansa 220; that the Developer has the managerial and technical expertise, experience, organization, and financial resources to develop the subject property into residential units; that both parties in the Memorandum of Agreement agreed to have a sharing of 1,056 saleable units for the developer and 412 saleable units for the Landowner; and that you now request for an opinion relative to the following: DHacTC 1. Exemption of the Joint Venture from income tax under Section 27, in relation to Section 22 (B) of the National Internal Revenue Code of 1997 (NIRC) and the relevant provisions of Presidential Decree No. 929. 2. Exemption from corporate income tax, creditable withholding tax, capital gains tax and documentary stamp tax it being merely a transaction to effect the parties' capital contribution to the joint venture and not a taxable event; 3. Exemption of the Partition Agreement between Lima Land Inc. and Landmark Communities, Inc., whereby the parties agreed to allocate to each other their aliquot shares of 412 and 1,056 saleable units respectively, in consideration of their capital contribution, from documentary stamp tax, withholding taxes, capital gains tax, income tax, as the case may be. The allocation is merely to segregate the saleable areas between the two parties, as a return of their capital contribution in the joint venture. In reply, please be informed that: 1. 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. P.D. No. 929 amended the definition of the taxable corporation so 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; (4) To assist them in achieving competitiveness with foreign contractors, the joint ventures formed by them should not be considered as additional income tax lien. Considering therefore, 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 hereby opines that the joint venture by and between the Landowner and the Developer is not subject to income tax under Section 27 of the tax Code of 1997. 2. The assignment by the Landowner of its realty to Landmark Communities, Inc. is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the afore-stated assignment is merely a transaction to effect its capital contribution to the joint venture and not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) 3. The Partition Agreement whereby the Landowner and Developer will allocate unto each other their shares in the unit saleable area of the project, in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-240-2001 dated November 16, 2001) 4. The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing its parcels of land, the Landowner, neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) It is understood however, that upon the subsequent disposition by the co-venturers of the areas allocated to them, the gain that may be realized by them from such sale will be subject to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 24 (D) (1), as the case may be. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, 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. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service