Moldex Realty Inc.

October 24, 2007 BIR RULING [DA-556-07] 22 (B) DA-247-2001; DA-262-2001 Moldex Realty Inc. Moldex Bldg., Ligaya St., Corner West Avenue, Quezon City Attention: Mr. Maurito C. Tarobal AVP-Finance Gentlemen : This refers to your letter dated July 31, 2007 requesting for confirmation of your opinion that: 1. The Memorandum of Agreement ("MOA"), copy of which will be annotated on the back of the title to the PROPERTY, executed by Moldex Realty, Inc. (hereinafter referred to as the "DEVELOPER") and Moldex Land, Inc. (hereinafter referred to as the "OWNER"), does not give rise to a taxable joint venture within the meaning of Section 22 (B) of the Tax Code, as amended. The MOA is subject only to the documentary stamp tax of P15.00 imposed on the notarial acknowledgment of the MOA under Section 188 of the Tax Code, as amended. 2. The allocation of the saleable units and parking spaces from the condominium project (the "PROJECT") to the DEVELOPER commensurate to and in consideration of its respective contribution by way of the development of the PROPERTY referred to in the MOA, is not a taxable event, and thus, not subject to income/expanded withholding tax and/or capital gains tax, the allocation being a mere return of the capital that each of the parties has contributed to the PROJECT. 3. The contribution of the OWNER to the PROJECT in the form of real property and the allocation of the saleable condominium units and parking slots among the DEVELOPER and the OWNER in exchange for their respective contributions to the PROJECT, are not subject to the capital gains tax and creditable withholding tax, but only to the documentary stamp tax of P15.00 imposed on the notarial acknowledgment under Section 188 of the same Code. EHASaD The facts as represented are as follows 1. The OWNER is the legitimate and registered owner of that certain parcel of land, referred to herein as the PROPERTY, consisting of and identified as Lots No. 2, 3, 6 and 10, all of the consolidation and subdivision plan Pcs556, containing an aggregate area of Four Thousand Twenty-Three and Three-Tenths (4,023.30) square meters more or less, and covered by Transfer Certificate of Title Nos. 232437 (for Lots 2 and 3) and 232436 (for Lots 6 and 10) of the Registry of Deeds for Manila. 2. The OWNER wishes to cause the development of a residential condominium on the PROPERTY, to be known as The Grand Towers, and referred to herein as the PROJECT, and the marketing and selling of the individual condominium units therein. 3. The DEVELOPER, being confident of the desirability and viability of the development concept being contemplated for the PROPERTY and the PROJECT, has offered to develop or cause the development of the Project, and provide the required funding, materials, equipment, supplies, services, and all other undertakings necessary until full completion, which the OWNER has accepted subject to the terms and conditions set forth in the joint venture undertaking. 4. Moldex Realty Marketing, Inc., (MARKETING AGENT) together with its accredited partners, being likewise confident of the over all marketability and saleability of the PROJECT, has likewise proposed to the OWNER to market and sell all the individual condominium units derived from the PROPERTY on an exclusive basis. 5. The OWNER being cognizant of the track record and performance of both DEVELOPER and MARKETING AGENT, and having full trust and confidence in their capacity and capability, has accepted their proposals for the development of the PROJECT and the marketing and sale of the individual units therein, subject to payment of compensation as spelled out in the MOA; 6. For and in consideration of the foregoing premises, the OWNER has granted unto the DEVELOPER full and irrevocable rights and authority to cause the development of the PROJECT, and likewise unto the MARKETING AGENT full and irrevocable rights and authority to market and sell all the disposable condominium units therein on an exclusive basis, subject only to the provision that the Owner and the Developer may, at their own individual option, market any of their units in coordination with the marketing agent; 7. Based on the joint venture agreement, which shall be annotated on the title to the PROPERTY, it is the intention of the parties that to cause the development of the PROPERTY, the OWNER will be contributing in the joint venture the PROPERTY and the DEVELOPER the required development works. The parties agree to share in the total saleable area and parking spaces to be jointly identified by the parties by assigning and allocating 20% of the total saleable area and parking spaces to the OWNER and 80% to the DEVELOPER; 8. The allocation and distribution of the individual condominium units and parking spaces to the co-venturers are mere return/distribution of their investment in the joint venture project, said transaction is not in the nature of "sales, barters, exchanges and leases of goods and properties, rendering of services, as defined under Section 105 of the 1997 Tax Code. Therefore, said transactions are not covered by VAT. However, the subsequent sales of the subdivided lots by the co-venturers to their customers shall be subject to the provisions of the National Internal Revenue Code as pertaining to the Value Added Tax. 9. The contribution of land by the OWNER to the PROJECT is likewise not subject to capital gains tax/creditable withholding tax presumed to have been realized from the sale, exchange or other disposition of real property because there is no transfer made in the course of business but only as capital contribution to the PROJECT; aHSAIT 10. The subsequent disposition by the parties under the MOA of the saleable units and parking spaces allocated to them and any gain that may be realized by them from such sales will be subject to the regular income tax; In reply, please be informed of the following: 1. The MOA executed between Moldex Realty, Inc. and Moldex Land, Inc. described above is an agreement between the parties to construct and fund the cost of construction of residential condominium project 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 MOA (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the MOA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code, as amended. (BIR Ruling No. DA-247-2001 dated November 27, 2001) 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 MOA 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 residential units and parking spaces to the DEVELOPER and the OWNER in accordance with their respective equity contributions as stipulated in the MOA 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. It is to be understood, however, that upon subsequent disposition by the parties under the MOA of the individual/subdivided units and parking spaces 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, 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. (BIR Ruling No. DA-262-2001 dated December 18, 2001) aIcETS 3. The contribution of the OWNER to the PROJECT in the form of real property and the allocation of the subdivided units and parking spaces among the DEVELOPER and the OWNER in exchange for their respective contributions, pursuant to the MOA/joint venture agreement are not subject to the capital gains tax imposed under Section 24 (D) of the 1997 Tax Code. The OWNER did not convey or transfer their ownership or interest over their real property when they contributed the aforesaid parcel of land to the joint venture but merely pooled their resources into a common fund. The said contribution constituted their capital contribution to the joint venture project, therefore, such contribution is not a taxable event that will give rise to the payment of regular income tax, creditable withholding tax and capital gains tax because the transfer or conveyance is not in the course of business but a capital contribution. (BIR Ruling No. DA-262-2001 dated November 18, 2001) 4. Finally, the joint venture or the party who undertakes the development of the project shall file an Annual Information Return and other returns required to be filed with the RDO where it is registered or required to be registered. 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. ETAICc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service