BIR Ruling [DA-468-04]

September 3, 2004 BIR RULING [DA-468-04] Ms. Maria Theresa C. Rosell Cebu City M a d a m : This refers to your undated letter stating that Rosario Velez Climaco and Ana Ma. V. Climaco (Landowners) are the absolute and registered owners of several real properties located in Cebu City with an aggregate area of 2,218 square meters covered by TCT Nos. 162314, 160985, 150094, 150095, 150093, 150292 and 159382 issued by the Registry of Deeds for Cebu City; that Climaco Realty and Development Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that on September 11, 2003, a Joint Venture Agreement was entered into by the Landowners and Climaco Realty and Development Corporation for the development of the subdivision project; that the salient features of the said agreement are as follows: (1) The company agrees to undertake the development of the property into a residential subdivision and agrees to perform the following: (a) Site clearing and filing; (b) Laying of drainage system; (c) Paving of roads and gutters. (2) The company shall survey and prepare the engineering designs and such other in accordance with the rules and regulations as required by the Housing and Land Use Regulatory Board (HLURB), the Bureau of Lands, and such government agencies that regulate the development of residential subdivisions; (3) The company shall also secure all necessary permits, clearances and licenses from the HLURB, the Bureau of Lands, and such other government instrumentalities or agencies as may be necessary to develop the properties; (4) Upon the execution of the JVA, the company shall have the right to enter the properties and to conduct survey and other works required thereon; (5) The parties agree that the development works specified in Section 1 above shall be completed within one (1) year from the approval of the site development plan by the HLURB (6) In consideration for the performance of its obligations, the Owners agree to compensate the company in the form of residential lots constituting sixty-eight percent (68%) of the net saleable area, while the owners shall retain the remaining thirty-two percent (32%). For purposes hereof, the parties agree that the owners shall retain Lot Nos. 1, 9 and 10 as indicated in the subdivision plan which is equivalent to 32% of the net saleable area, while the company shall be compensated with Lot Nos. 2, 3, 4, 5, 6, 7 and 8; that the parties further agree that they shall mutually agree on the selling price of the lots, and that each party shall not sell their respective lots below the agreed price; (7) All real property taxes due on the Properties until the turnover of the share of the company shall be for the account of the owners. All real property taxes for the roads and open spaces shall be for the account of the owners; (8) Upon the approval of the development plan by the HLURB, the owners shall execute a Deed of Assignment in favor of the company covering the shares of the company so that titles to the lots pertaining to the company can be issued in its name. Upon release of the said titles, the company shall execute a Deed of Assignment in favor of the owner, and shall be kept by the owners as security for the faithful compliance by the company of its obligations; (9) The parties agree that the company shall be solely responsible to government agencies and/or third parties for any violations of any laws, rules and regulations respecting the development works, or for any claim, suit or damage suffered by any third person arising from and/or related to the development works contemplated in this Agreement; and (10) The parties agree that this Agreement shall be annotated on TCT Nos. 162314, 160985, 150094, 150095, 150093, 150292, 159382 and 149578. In connection therewith, you now request a ruling on the tax implication of the Joint Venture Agreement entered into by the Landowners and Climaco Realty & Development Corporation relative to the development of the subdivision project. In reply thereto, please be informed that 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 excluded joint venture formed for the purpose of undertaking construction projects from the definition of the term "Corporation" because (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. 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 holds that the Joint Venture Agreement entered into by the Landowners and Climaco Realty and Development Corporation for the development of the aforesaid properties into a small residential subdivision is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. Moreover, the transfer of the properties by the Landowners to the Climaco Realty and Development Corporation pursuant to their JVA is not subject to the capital gains tax and to the documentary stamp tax under Sections 24(D)(1) and 196 of the Tax Code of 1997. However, the certification is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the said Code. aEAIDH However, the co-venturers are separately subject to the regular individual and corporate income taxes on their respective taxable income during each taxable year derived by them from the aforesaid subdivision project. Moreover, the Joint Development Agreement entered into by and between the Landowners and Climaco Realty and Development Corporation is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997. However, the sale of the said real properties shall be subject to the documentary stamp tax under Section 196 of the said Code. Moreover, the allocation and distribution of their respective shares in the project consisting of developed lots and the housing structures built thereon in consideration of their respective contributions, as stipulated in the Joint Venture Agreement 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. ( BIR Ruling Nos. 10-96 dated January 23, 1996; DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998 ) Furthermore, since the partition to be executed by the parties allocating and distributing between them their respective shares in the project in exchange for their respective contributions is without monetary consideration but merely acknowledges and confirms the title and ownership of the above-named Landowners and Climaco Realty and Development Corporation, the same is not subject to the value-added tax, income/creditable withholding tax nor to the documentary stamp tax respectively imposed under Sections 106, 24(c), 27(A) as implemented by Revenue Regulations No. 2-98, as amended, and 196 all of the Tax Code of 1997. However, the sale of the respective share of the Landowners and/or Climaco Realty and Development Corporation of the aforesaid properties shall be subject to the creditable withholding tax, VAT and documentary stamp tax pursuant to Revenue Regulations No. 2-98, as amended, Sections 106(A) and 196 of the Tax Code of 1997. Finally, this will authorize the Revenue District Officer (RDO) of the revenue district where the properties is located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by the above-named Landowners and Climaco Realty and Development Corporation, as the Developer, based on their respective allocations pursuant to the partition without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. ECDaAc This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service