BIR Ruling [DA-488-98]

November 16, 1998 BIR RULING [DA-488-98] Union Properties, Inc. 6/F SSS Makati Building Ayala Avenue cor. Herrera St. Makati City Attention: Erramon I . Aboitiz Aboitiz & Company Mr . Anthony Charlemagne C . Yu Empire East Landholdings, Inc . Mr . Aurelio C . Mercado Union Properties Gentlemen : This refers to your letter dated September 30, 1997 requesting for ruling on the tax consequence of the following: "1. Assignment of the thirteen (13) parcels of land on which the Kingswood Condominium Project is constructed in favor of the Kingswood Condominium Corporation. "2. Memorandum of Agreement among the landowner and developers for the construction of the Kingswood Condominium Project; and "3. Partition Agreement among the parties in the Memorandum of Agreement allocating among them the condominium units in the Project for and in consideration of their joint effort and undertaking in the construction and development of the Project." It is represented that on October 28, 1994, a Memorandum of Agreement was executed by and among the following parties with their concomitant role in the development of thirteen (13) parcels of land with an aggregate area of 4,763 square meters now covered by TCT Nos. 210324, 210325 and 210396 of the Registry of Deeds of Makati, into a condominium project, to wit: "Aboitiz and Company, Inc. will contribute the above parcels of land and will provide additional Project funding up to 40% of the estimated project cost, inclusive of the value of the land. "Empire East Landholdings, Inc. will provide additional Project funding of up to 33% of the Project cost, and will provide the expertise in the conceptual development of the Project. "Union Properties, Inc. will provide over-all project supervision and additional Project funding of up to 27% of the Project cost." that under the Memorandum of Agreement, the parties thereto agreed to pool their resources for the construction and development of a condominium project in consideration of each of the parties acquiring ownership of such number of specifically designated condominium units and parking slots in the Project; and that also, under the Memorandum of Agreement, the parties, while agreeing to pool their resources in the construction and development of the Project, shall at all times maintain separate ownership of their individual resources and properties contributed in undertaking the construction and development of the Project, and keep and maintain separate books of account for each party to monitor their cost and expenses in the Project. In reply, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, the term corporation includes 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. Thus, it is our opinion that the joint venture of Aboitiz and Company, Inc., Empire East Landholdings, Inc. and Union Properties, Inc. is not subject to the corporate income tax under Section 27 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. Considering the foregoing, the Memorandum of Agreement executed by Aboitiz and Company, Inc., Empire East Landholdings, Inc. and Union Properties, Inc. for the construction and development of the Project, and the allocation of their specific floors or units therein and parking slots in the Project will not give rise to a separate taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997, and that the allocation between Aboitiz and Company, Inc., Empire East Landholdings, Inc. and Union Properties, Inc. of the floors or units therein and parking slots in consideration of their contribution in the Project, as stipulated in the Memorandum of Agreement, is not a taxable event and is not subject to income/expanded withholding tax, because the allocation is a mere return of the capital that each has contributed to the Project. However, should Aboitiz and Company, Inc., Empire East Landholdings, Inc. and Union Properties, Inc. sell any of the floors or portions of the floors allocated to them to third parties, the gain that may be realized by Aboitiz and Company, Inc., Empire East Landholdings, Inc. and Union Properties, Inc. from such sale will be subject to the regular 35% corporate income tax under Section 27(A) of the Tax Code of 1997, and to the creditable/expanded withholding tax under Revenue Regulations 6-85, as amended. (BIR Rulings No. 274-992 dated September 30, 1992 and UN-025-95 dated January 11, 1995) Moreover, Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26) provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Accordingly, since the aforementioned Partition Agreement and Assignment of Land Titles to Condominium Corporation are without consideration and are not in connection with a sale made to Aboitiz and Company, Inc., Empire East Landholdings, Inc. and Union Properties, Inc., respectively, no income was generated and a fortiori, no creditable/expanded withholding and documentary stamp taxes are payable and collectible. However, the acknowledgments to said Partition Agreement and Assignment of Land Titles to Condominium Corporation are subject to the documentary stamp tax of P15.00 each pursuant to Section 188 of the Tax Code of 1997. In view thereof, the Partition Agreement whereby Aboitiz and Company, Inc., Empire East Landholdings, Inc. and Union Properties, Inc., allocate unto each other their respective shares in the floors or units and parking slots in the Project, in consideration of their respective contributions in the Project, and that the Assignment of Land Titles to Condominium Corporation to be executed by Aboitiz and Company, Inc. to convey the land to a condominium corporation formed pursuant to the Condominium Act, considering both are without monetary consideration, will not be subject to income, creditable/expanded withholding and documentary stamp taxes under Section 196 of the Tax Code of 1997. (BIR Ruling No. 207-92 dated July 16, 1992, 349-93 dated July 30, 1993 and UN-025-95 dated January 11, 1995) 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.) BEETHOVEN L. RUALO Commissioner of Internal Revenue