BIR Ruling [DA-512-05]

December 19, 2005 BIR RULING [DA-512-05] 22 (B); DA-320-2005 Brittany Corporation The Penthouse, Richville Corporate Tower Madrigal Business Park, Alabang-Zapote Road Alabang, Muntinlupa City Attention: Ms. Cecilia A. Ramilo Head, Tax Department Gentlemen : This refers to your letter dated December 12, 2005 requesting for confirmation of your opinion that: 1. The Joint Venture Agreement (JVA) executed by and among Eastridge Estates, Incorporated ("EASTRIDGE"), Adelfa Properties, Incorporated ("API"), Palmera Homes, Incorporated ("PALMERA"), as the LANDOWNERS, and Tuscany Estates Development Corporation ("TUSCANY") as the DEVELOPER, whereby TUSCANY subsequently assigned all its rights and obligations over said JVA to Brittany Corporation ("BRITTANY"), for the development of several parcels of land into a first class residential subdivision and/or a mixed-use residential and commercial complex, will not give rise to a taxable joint venture as provided under Section 22(B), in relation to Section 27(A), both of the National Internal Revenue Code (NIRC), as amended; SAEHaC 2. The allocation of saleable lots between the LANDOWNERS and BRITTANY in consideration of their respective contributions, as stipulated in the JVA, is not a taxable event and is not subject to income tax, and subsequently withholding tax, and the Value-Added Tax (VAT), since the allocation of saleable lots is in fact a mere return of capital that each has contributed; 3. The Partition Agreement whereby the LANDOWNERS and BRITTANY allocated unto each other their share in the saleable lots in consideration of their respective contributions, is not subject to the Documentary Stamp Tax (DST) imposed under Section 196 of the NIRC, as amended, nor to any income tax, and consequently withholding tax, since the allocation is made without monetary consideration and is not in connection with a sale. Rather, the partition is made merely to segregate the saleable lots between the parties, as the return of the capital which each contributed. However, it is understood that should the LANDOWNERS and/or BRITTANY sell any of the saleable lots allocated to them, to third parties, the gain that may be realized from said sale will be subject to regular (corporate) income tax, in accordance with Section 27 of the NIRC, as amended by Republic Act No. 9337 and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as last amended by RR No. 30-2003. Based on the representations, as well as from the documents submitted, the facts are as follows: On March 20, 2003, a Joint Venture Agreement ("JVA") was executed by and among EASTRIDGE, API, and PALMERA, as the LANDOWNERS, and TUSCANY as the DEVELOPER, covering the development of eight (8) parcels of land covered by Transfer Certificates of Title (TCT) Nos. T-850992, T-836221, T-500480, T-851001, T-850999, T-850997, T-850998, and T-850995 consisting of an aggregate area of One Hundred Thousand Sixty Two (100,062) square meters. On August 20, 2003, TUSCANY, with the consent of EASTRIDGE, API and PALMERA, assigned all its rights and obligations over said JVA to BRITTANY. Then on November 18, 2005, the parties executed an Amendment to the March 20, 2003 JVA, wherein Household Development Corporation ("HOUSEHOLD"), was included as additional party-landowner in the JVA and the inclusion of two (2) parcels of land to the joint venture covered by TCT Nos. T-851018 and T-850996. Hence, the parties executed the corresponding Deed of Partition based on the above-mentioned Amended JVA resulting to sharing of the saleable lots in the JVA, as follows: DEVELOPER (BRITTANY) 61% EASTRIDGE 11.80% ADELFA 17.34% PALMERA 7. 19% HOUSEHOLD 2.67% In reply, please be informed as follows: 1. The JVA executed between the LANDOWNERS and BRITTANY described above is an agreement between the parties for the subdivision and development of aforementioned parcels of land into a first class residential subdivision and/or a mixed-use residential and commercial complex which is neither a contract of sale over real property nor an instrument which conveys title to real property. Hence, no income tax or documentary stamp tax (DST) is due upon the execution of the JVA (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the JVA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code, as amended. ( BIR Ruling No. DA-303-2005 dated July 5, 2005 ) Section 22(B) of the 1997 Tax Code, as amended, provides: "(B) 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. "General professional partnership" are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." HSDIaC From the foregoing definition of a corporation, we confirm your opinion that the JVA executed between the parties does not give rise to a taxable joint venture. The parties to a joint venture agreement may file separate income tax returns for their net revenue for the above-mentioned project less their respective proportionate share in the joint venture expenses since the joint venture is not embraced within the meaning of the term "corporation", hence, not subject to the corporate income tax imposed under Section 27(A) of the 1997 Tax Code. ( BIR Ruling No. 002-97 dated January 14, 1997 ) 2. The allocation and distribution of the saleable lots to the LANDOWNERS and BRITTANY in accordance with their respective equity contributions as stipulated in the Deed of Partition is not subject to income tax, withholding tax or capital gains tax, since the allocation/distribution is without consideration, not in connection with a sale and constitutes mere return of capital. Likewise, the said allocation and distribution is not subject to DST for want of consideration. It is to be understood, however, that upon subsequent disposition by the parties under the JVA of the individual/subdivided lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rate provided under Section 27(A) of the 1997 Tax Code, as amended by R.A. No. 9337, capital gains tax imposed under Section 24(D) of the same Code, and to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as last amended by RR No. 30-2003. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code, as amended, 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, as implemented by RR No. 16-2005. ( BIR Ruling No. DA-262-2001 dated December 18, 2001 ) 3. The Partition Agreement whereby the LANDOWNERS and BRITTANY have allocated unto each other their share in the saleable lots in consideration of their respective contributions, are not subject to the DST imposed under Section 196 of the NIRC, as amended, considering that the allocation is made without monetary consideration and is not in connection with a sale. In this regard, 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 was executed without consideration and was not in connection with a sale between the LANDOWNERS and BRITTANY, no DST is due and collectible on said Partition Agreement. However, we understand that the notarial acknowledgments to said Partition Agreement shall be subject to the DST pursuant to Section 188 of the NIRC, as amended, in the amount of P15.00. 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. aAcHCT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service