Chato & Vinzons-Chato

August 10, 2007 BIR RULING [DA-445-07] Chato & Vinzons-Chato 8th Floor, STRATA 2000 F. Ortigas Jr. Road Ortigas Center 1605 Pasig City Attention: Atty. Esther R. Ibaez Gentlemen : This refers to your letter dated March 7, 2007 stating that Estrella Vallejo Realty, Inc. (EVRI) formerly owns a parcel of land located at West Avenue corner Col. Martinez Street, Diliman, Quezon City containing an area of 715.80 square meters covered by TCT No. 25343; that on January 12, 1996, Westmontvent Development, Inc. (Westmontvent) and EVRI entered into a Memorandum of Agreement (MOA) wherein a joint condominium venture was established for the purpose of developing the subject property into an office condominium; that under the MOA, Westmonvent, being the developer, guarantees to construct a fifteen (15) story office condominium on EVRI's property; that to facilitate the securing of permits from the Housing Land Use and Regulatory Board (HLURB) and the subdivision of the mother title into individual condominium certificates of title (CCTs), the subject parcel of land was transferred to Westmontvent, which property is now covered by TCT No. N-157465 under the name of Westmontvent; that in return, EVRI took possession of the individual CCTs which were entrusted to Metro Bank, Annapolis Branch for safekeeping; that for its capital contribution to the joint venture, EVRI's full payment, as agreed upon in the MOA, shall be in the form of condominium units in the 2nd and 15th floor level and 4 non-title parking lots; that on February 14, 2006, the parties signed an addendum to the MOA, reiterating the provisions thereof and further stating that after the mother title had been subdivided into individual CCTs by the Register of Deeds, Westmontvent, the developer, shall transfer unto EVRI, the landowner, the corresponding CCTs assigned to it as the total interest of EVRI in the project; that Westmontvent has now completed the condominium project and, pursuant to the MOA and its addendum, shall transfer the agreed condominium units to EVRI. In connection therewith, you now request for an opinion on the tax consequence relative to the transfer of the condominium units by Westmontvent to EVRI pursuant to the MOA. In reply, please be informed that your opinion is hereby confirmed 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. It is to be emphasized, however, that P.D. 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. AIDSTE 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 MOA entered into by Westmontvent and EVRI is not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. 2. The allocation and distribution of the saleable units to EVRI and Westmontvent in consideration of their respective contributions, as stipulated in the MOA is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. Moreover, in the event that Westmontvent, as developer, decides to transfer the units representing its share in the saleable units under its name, such transfer is subject to the aforementioned taxes. 3. However, upon subsequent sale by EVRI and Westmontvent of their respective shares in the saleable units to third parties, the gain that may be realized by them from such sale will be subject to the regular corporate income tax under Section 27 (A) or individual income tax under Section 24 (A) of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended, and to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, and to the value-added tax imposed under R.A. No. 9337, as implemented by Revenue Regulations No. 16-2005, unless exempt under Section 109 (w), supra . ( BIR Ruling Nos. 274-92 dated September 30, 1992; 010-96 dated January 23, 1996; BIR Ruling Nos. DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998 ) 4. This will authorize the Revenue District Officer (RDO) of the revenue district where the property is located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the sale of developed units as prescribed in Revenue Regulations No. 24-2002. 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