BIR Ruling [DA-513-05]

December 21, 2005 BIR RULING [DA-513-05] 22 (B); DA-303-2005 Filinvest Land Incorporated 173 P. Gomez St., San Juan Metro Manila Attention: Atty. Andrew James Gerard Dulay Ruiz Tax Counsel Gentlemen : This refers to your letter dated July 19, 2005 requesting for confirmation of your opinion that: 1. The Development Agreement between Filinvest Land, Inc. ("FLI" for brevity) and V.S. Narciso Realty and Development Corporation ("V.S. Narciso" for brevity) for the subdivision and horizontal development of a parcel of land, covered by Transfer Certificate of Title (TCT) No. 580947 (transfer from TCT Nos. 498711-16/T-2769, 507717-21/T-2814), located in Barangays San Isidro and San Roque, Angono, Province of Rizal, into a residential subdivision, 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; 2. The allocation of saleable lots between FLI and V.S. Narciso in consideration of their respective contributions, as stipulated in the Development Agreement, 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 FLI and V.S. Narciso allocated unto each other their shares 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 FLI and/or V.S. Narciso 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 at 32%, in accordance with Section 24 of the NIRC, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. The facts, as represented are as follows: FLI is a corporation duly organized and existing under the laws of the Republic of the Philippines, engaged in the business of acquiring, developing and selling real estate, including residential subdivisions. The V.S. Narciso is the absolute and registered owner in fee simple of a parcel of land abovementioned. TIEHSA On June 20, 1990, Filinvest Development Corporation ("FDC" for brevity), as the developer, entered into a Development Agreement with V.S. Narciso for the subdivision and horizontal development of the above-mentioned property. However, FDC was unable to develop the said property immediately because there are changes in agreements between the parties, as well as changes in the requirements of the local government units involved which caused the delay of the development. Given the said situation, the management of FDC initiated plans to transfer its rights and obligations under the Development Agreement to FLI in 2004. This was the most advisable business arrangement, considering that within the Filinvest Group of companies, FLI replaced FDC as the main real estate developer. In preparation of this transfer, FLI secured the Permit to Develop the said real property on December 23, 2004. Prior to said date, there having been no approved permit to develop, FDC did not initiate development of the said real property, and as such, FDC had not incurred any costs otherwise attributable to development. Subsequently, FDC assigned its rights and obligations as developer of the subject property, known as Forest Farms Subdivision Project, to FLI per a Deed of Assignment dated March 21, 2005. Given that no costs were incurred in the development, as no development had actually taken place as of yet, no monetary consideration was made for the assignment of the rights and obligations by FDC to FLI. On July 13, 2005, FLI and V.S. Narciso entered into a Partition Agreement, whereby the developed saleable lots were allocated between FLI and V.S. Narciso, based on the terms of the Development Agreement. The said documents adjudicated the said saleable lots between the parties, as part of their respective shares in the Forest Farms Subdivision Project, to allow the registration of said allocated saleable lots in their respective names. In reply, please be informed of the following: 1. The Development Agreement executed between FLI and V.S. Narciso described above is an agreement between the parties for the subdivision and horizontal development of a parcel of land into a residential subdivision 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 Development Agreement (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the said document is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code. ( BIR Ruling No. DA-303-2005 dated July 5, 2005 ) Section 22(B) of the 1997 Tax Code, 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." From the foregoing definition of a corporation, we confirm your opinion that the Development Agreement 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 revenues from the above-mentioned project less their respective proportionate shares 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 FLI and V.S. Narciso in accordance with their respective equity contributions as stipulated in the Development Agreement 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. CEIHcT It is to be understood, however, that upon subsequent disposition by the parties under the Development Agreement of the individual/subdivided lots allocated to them, the gains 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, capital gains tax imposed under Section 24(D) of the same Code, and to the creditable withholding tax under Revenue Regulations 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 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. ( BIR Ruling No. DA-262-2001 dated December 18, 2001 ) 3. The Partition Agreement whereby FLI and V.S. Narciso have allocated unto each other their shares 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 were not in connection with a sale between FLI and V.S. Narciso, no DST is due and collectible on said Partition Agreement. However, the notarial acknowledgment 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. AcSEHT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service