BIR Ruling [DA-561-99]

September 29, 1999 BIR RULING [DA-561-99] Ong, Ordoez & Associates 9624 Pililia Street Makati City Attention: Ms . Anna Liza Menor Gentlemen : This refers to your letter dated January 4, 1999 stating that your clients, Speedy Realty & Development Corporation (SRDC) and St. Catherine Realty Corporation (SCRC), entered into a joint venture agreement to jointly develop into a commercial subdivision, six (6) parcels of land covered by Transfer Certificates of Titles Nos. 17719 P(M), 209206, 209207, 187848, 187849 and 187850 of the Registry of Deeds of Bulacan; that under the agreement, SRDC agreed to contribute the above-mentioned parcels of land and SCRC agreed to develop these lots into a commercial subdivision in consideration of each of the parties acquiring ownership of such number of specifically designated lot units; and that the parties also agreed to pool their resources in the construction and development of the subdivision and shall at all times maintain separate ownership of their individual resources and properties contributed in undertaking the construction and development of the subdivision, keeping and maintaining separate books of account for each party to monitor their cost and expenses in the project. cdll Based on the foregoing, you now request for a ruling on the tax consequence of the following: "1. Joint Venture Agreement between SRDC and SCRC. "2. Partition between SRDC and SCRC allocating between them the lots in the subdivision for and in consideration of their joint effort and undertaking in the construction and development of 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 SRDC and SCRC 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 Joint Venture Agreement executed by SRDC and SCRC for the construction and development of the project, and the allocation of their respective share 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 SRDC and SCRC in consideration of their contribution in the project, as stipulated in the Joint Venture 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 SRDC and SCRC sell any of their shares allocated to them to third parties, the gain that may be realized by SRDC and SCRC from such sale will be subject to the regular 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 Ruling No. 274-92 dated September 30, 1992 and UN-025-95 dated January 11, 1995) The said sale transaction shall also be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. 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 Joint Venture Agreement are without consideration and are not in connection with a sale made to SRDC and SCRC, no income was generated and a fortiori , no creditable/expanded withholding and documentary stamp taxes are payable and collectible. However, the acknowledgment to said Joint Venture Agreement is subject to the documentary stamp tax of P15.00 pursuant to Section 188 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) LibLex 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)