BIR Ruling [DA-404-05]

September 30, 2005 BIR RULING [DA-404-05] 22 (B); DA-303-2005 Mary's Garden Realty Development Corp . Barangay Anilao, Lipa City Batangas Attention: Mr. Antonio J. Montinola President Gentlemen : This refers to your letter dated August 15, 2005 requesting for a ruling on the tax implications of the Joint Venture Agreement entered into by and among Sta. Isabel Management & Development Corporation, Trina Management & Development Corporation, Tona Management & Development Corporation, Angie Management & Development Corporation, San Bernardino Realty, Inc., Isabelita J. Montinola, Luis J. Montinola and Trino S. Montinola III, all hereinafter collectively referred to as the "LANDOWNERS", regarding the real property situated in Bo. Anilao, Lipa City. The facts, as represented, are as follows: 1. In October 2002, the LANDOWNERS have decided to bond together by way of a Joint Venture and form an independent CONSORTIUM collectively owned by herein LANDOWNERS but professionally run with a separate legal personality in order to develop the subject properties, to be known as Mary's Garden Realty Development Corporation. 2. The CONSORTIUM wishes to cause the subdivision and development of the subject parcels of land into a farm-lot subdivision with an aggregate area of Three Hundred Twenty Six Thousand Six Hundred Eighty Eight and 50/100 (326,688.50) square meters. Having the facilities and technical know-how in the development work required by the LANDOWNERS in the subdivision of the above-described property, the CONSORTIUM shall undertake the subdivision and development of the same. Marketing shall be done by both the LANDOWNERS and the CONSORTIUM in relation to their specific lot shares and, in general, the management and operation of the subdivision project. 3. The expenses for the development works, segregation and subdivision of the mother titles and issuance of individual titles shall likewise be for the account of the CONSORTIUM. However, capital gains tax and/or withholding tax and documentary stamp tax, including value-added tax, if any relative to the transfer of individual lots to be assigned to the CONSORTIUM shall be for the account of the LANDOWNERS. 4. The parties further agree to share in the gross saleable area resulting from this venture by assigning to the parties designated individual lots comprising the entire subdivision. In this connection, sharing of the lots will be based solely on the stockholder's ownership in the CONSORTIUM. The parties shall, after the approval by the LANDOWNERS of the subdivision plan, agree on the specific lots to be assigned to each of them based on the principle that the parties shall equitably share in the prime and non-prime lots. In reply, please be informed of the following: 1. The Joint Venture Agreement executed between Mary's Garden Realty Development Corporation (CONSORTIUM) and the LANDOWNERS described above is an agreement between the parties for the development of the subject properties into a farm-lot 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 Joint Venture Agreement (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the Joint Venture Agreement is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code. ( BIR Ruling No. DA-303-2005 dated July 7, 2005 ) 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 (c uentas 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, the Joint Venture Agreement executed between the parties does not give arise 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 the parties in the Joint Venture in accordance with their respective equity contributions as stipulated in the 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. TAIcaD It is to be understood, however, that upon subsequent disposition by the parties under the Joint Venture 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 last amended by Revenue Regulations No. 30-2003. 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 contribution of the LANDOWNERS to the Joint Venture in the form of real property and the allocation of the subdivided lots among Mary's Garden Realty Development Corporation (CONSORTIUM) and the LANDOWNERS in exchange for their respective contributions, pursuant to the joint venture agreement are not subject to the capital gains tax-imposed under Section 24(D) of the 1997 Tax Code. The LANDOWNERS did not convey or transfer their ownership or interest over their real property when they contributed the aforesaid parcel of land to the Joint Venture but merely pooled their resources into a common fund. The said contribution constituted their capital contribution to the joint venture project, therefore, such contribution is not a taxable event that will give rise to the payment of regular income tax, creditable withholding tax and capital gains tax because the transfer or conveyance is not in the course of business but a capital contribution. ( BIR Ruling No. DA-262-2001 dated November 18, 2001 ) 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service