BIR Ruling [DA-431-05]

October 20, 2005 BIR RULING [DA-431-05] Laguna Properties Holdings, Inc . 4th Floor, Makati Stock Exchange Building Ayala Avenue, Makati City Attention: Atty. Mena R. Ojeda, Jr. Legal Counsel Gentlemen : This refers to your letter dated October 20, 2004 requesting for a confirmation of your opinion that (1) the joint development of a condominium project of Diamond Motor Corporation (DMC) and Laguna Properties Holdings, Inc. (LPHI) will not create a taxable joint venture within the meaning of Section 22(B) in relation to Section 27(A) of the National Internal Revenue Code of 1997 and (2) the allocation of their respective interests in the project and the execution of the Deed of Partition to implement such allocation, are not taxable events and are not subject to income/expanded withholding tax, value-added tax and documentary stamp tax under Section 196 of the Tax Code. It is represented that DMC is a corporation duly organized and existing under Philippine laws and is the registered owner of certain parcel of land located at Bonny Serrano Avenue, San Juan, Metro Manila, more particularly identified as the parcel of land described under Transfer Certificate of Title No. RT-18115 (214935);that LPHI on the other hand is a corporation duly organized and existing under Philippine laws and is engaged in the development of real estate; that on March 8, 2004, DMC and LPHI entered into a Joint Development Agreement for a joint development of the said parcel into a condominium project which the parties have agreed to call "Aeropolis 2 New Manila";that the project includes the planning, construction and development of the parcel together with condominium buildings and improvements in phases and the marketing and sale of the condominium units therein; that the specific terms of the Agreement are as follows: (a) DMC shall contribute the Parcel (and all its rights, title and interest in and to the same) that will constitute the entire area of the Project; (b) LPHI shall contribute the necessary cash for the construction and development of the Project and perform all the development for the Project; (c) In consideration of and in return for, their respective contributions to the Project, DMC and LPHI shall share in the distribution of the Condominium Units in each building constituting part of the Project proportionate to their respective contributions. Thus: (1) to DMC shall be allocated and DMC shall receive such number of Condominium Units in each building as may be equivalent to the following amount: Number of Saleable Units Allocated to DMC = 12.55% x Gross Selling Price of Each Saleable Unit within the Project Land Area. IAEcaH (2) to LPHI shall be allocated and LPHI shall receive such number of Condominium Units as may be equivalent to the following amount: Number of Saleable Units Allocated to LPHI = 87.45% x Gross Selling Price of each Saleable Unit within the Project Land Area. (d) In accordance with the provisions of Presidential Decree No. 957, Republic Act No. 4726 and the rules and regulations implementing the same, the Common Areas in a Building shall be ceded to and registered in the name of the Condominium Corporation upon Completion of the particular Phase to which the Building pertains, and the Parcel shall be conveyed to and registered in the name of the Condominium Corporation upon Completion of the Project; provided that, prior to the conveyance and registration of the Parcel in the name of the Condominium Corporation, possession of that portion of the parcel pertaining to a completed phase shall be conveyed to the Condominium Corporation for the use of the owners and residents of the Condominium Units of the completed Phase; provided further that, upon conveyance of possession of that portion of the Parcel pertaining to a completed Phase, the Condominium Corporation shall be responsible for the payment of the real property taxes on said portion of the Parcel and the administration and management thereof; (e) For the purpose of effecting the distribution of their respective allocated Condominium Units for each Phase of the Project, the parties shall execute a deed of partition without monetary consideration. After distribution, the Parties shall maintain separate ownership of their allocated Condominium Units and may sell or transfer their respective Condominium Units to third parties. In reply, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, the term "corporation" shall include 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. Such being the case, the Joint Venture entered into by and between DMC and LPHI is not subject to corporate income tax under Section 27 of the Tax Code of 1997. Likewise, gross payments received by the joint venture is not subject to the 2% expanded withholding tax prescribed under Section 57(B) of the Tax Code of 1997 as implemented by Revenue Regulations No. 6-85 and amended by Revenue Regulations No. 2-98. The allocation of saleable area of the project between DMC and LPHI in consideration of their respective contributions, as stipulated in the 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 areas allocated to them, the gain that may be realized from such sale will be subject to the regular income tax rates under Sections 24, 27(A) or 27(E) of the Tax Code of 1997, as the case may be, and/or to the creditable withholding tax under Revenue Regulations No. 2-98. Furthermore, said 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 property whichever is higher. Moreover, the said sale shall also be subject to value-added tax. CSAcTa The Partition Agreement whereby DMC and LPHI will allocate unto each other their share in the saleable area in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area between the parties, as the return of the capital which each contributed. However, the Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-097-2001 dated May 28, 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, this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue