BIR Ruling [DA-443-03]

December 5, 2003 BIR RULING [DA-443-03] 22 (B) DA-096-2000 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons-Equitable Tower 4 ADB Ave. cor. Pedro Poveda Street Ortigas Center, Pasig City Attention: Attys . Ruelito Q . Soriano, Benedict R . Tugonon and Cheryll June M . Calaguio Gentlemen : This refers to your letter dated November 13, 2003 quoted as follows: "On March 16, 2001, the Florida Del Mar, Inc. (the "Landowner") and Builders 2000, Inc. (the "Developer") entered into a Joint Venture Agreement ("JVA") whereby they agreed to build a condominium building on the property of the Landowner (the "Project"). The parcel of land contributed by the Landowner is situated at 2126 A. Mabini Street, Malate, Metro Manila, with (sic) an area of 1,184 sq.m., more or less (the "Property"), covered by Transfer Certificate of Title No. 252662 issued by the Registry of Deeds of Manila in the name of the Landowner. . . . Due to the continued devaluation of the peso and the resulting increase in cost in the development of the Project, the Developer anticipated that it may not be able to meet all the financial requirements necessary to ensure the completion of the Project, in accordance with the expectations, time schedule and specifications of the Developer and the Landowner. Thus, the Landowner and the Developer saw it fit to invite new co-developers who will provide the necessary funds necessary. As a result, a Supplement and Amendment to Joint Venture Agreement ("Supplement JVA") was entered into by and among the Landowner, the Developer and the following persons, who would serve as co-developers: Gampik Construction and Development, Inc. Emma Laperal Alexander Litton Emily Bengzon Ernest John Litton Gerardo Litton Gloria Del Rio James T. Litton Monaliza Gallego Mario F. Sales Glenn Victor V. Barranda The above-mentioned individuals and Gampik Construction and Development Inc. shall hereinafter be referred to as the "Co-developers" and collectively with the Developer as the "Developers". Under the Supplement JVA, the Landowner agreed to transfer possession over the Property to the Developer for the purpose of developing such into a twenty eight-storey residential condominium building (the "Condominium Project"). For its part, the Developers, undertook to provide all the necessary resources for the construction and completion of such condominium building. Upon the completion of the Condominium Project, ownership of the different condominium units will be apportioned between the parties as their respective share in such joint venture undertaking. CIaDTE Pursuant to Section 2 of Republic Act No. 4726, otherwise known as the Condominium Act, the parties shall cause the incorporation of a condominium corporation, a non-stock, non-profit corporation which will be tasked to own and manage the common areas of the Condominium Project. Since the Property will form part of the common areas of the Condominium Project, the Landowner will transfer the title over the Property in favor of such condominium corporation. Such transfer will be affected without Landowner receiving any monetary consideration from the Condominium Corporation." Given the facts, as stated above, you now request for a ruling confirming your opinion that: 1. The joint venture for the construction of the Condominium Project does not give rise to a separate taxable entity; 2. The assignment/transfer of the Units to the parties is exempt from all types of taxes considering that the original registration of the respective commercial/residential units and parking spaces in the Landowner's name does not yet involve any transfer to third persons or the public; and 3. The transfer of title to the land from the Landowner to the condominium corporation will not be subject to tax; In reply, please be informed as follows: 1. 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. P.D. No. 929 amended the definition of the 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; (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 entered into by and between the Landowner and the Developers is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The allocation of the Units in the Condominium Project between the Landowner and the Developers in consideration of their respective contributions, as stipulated in the Supplement JVA 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 by them from such sale will be subject to the regular income tax rate under Section 24 (D) and 27(A) of the Tax Code of 1997, and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. Moreover, 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 properties whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. The Partition Agreement whereby the Landowner and the Developers will allocate unto each other their share in the Units 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 Units between the parties, as the return of the capital which each contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. Finally, the Deed of Conveyance that will be executed transferring to the condominium corporation the management of the common areas of the aforesaid project will not be subject to creditable withholding tax pursuant to Section 57(B), in relation to Sections 24 and 27 of the Tax Code of 1997. Neither it is subject to the documentary stamp tax imposed under Section 196 of the same Code, because conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable. But the notarial acknowledgment to said deed of conveyance is subject to the documentary stamp tax of P15.00 pursuant to Section 188 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 ascertained that the facts are different, then this ruling will be considered null and void. aTEScI Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service