BIR Ruling [DA-605-99]

October 12, 1999 BIR RULING [DA-605-99] De Borja Medialdea Bello Guevarra & Gerodias Law Partnership 15th Floor, Strata 100 Bldg. Emerald Avenue, Ortigas Center Pasig City Attention: Atty . Raul G . Gerodias Gentlemen : This refers to your letter dated July 5, 1999 requesting for a ruling on the tax consequences of the Agreement entered into by and between Ms. Maria Clara L. Lobregat (Lobregat), Lorenzo Enterprises, Inc. (LEI), Grand Metro Lorenzo Corporation (GMLC), Grand Metro Asia, Inc. (GMAI) and Dahilayan Ventures, Inc. (DVI). LexLib It appears that Lobregat is the registered owner of a parcel of land situated in Malate, Manila covered by Transfer Certificate of Title No. (TCT) 216741 consisting of 333 sq.m.; that LEI a corporation duly organized and existing under Philippine laws is the absolute owner of four (4) parcels of land covered by TCT Nos. 122718, 122719, 122720 and 216742 with an aggregate area of 1,142.6 sq.m. all located at Malate, Manila; that GMLC is a domestic corporation engaged in real estate development and presently undertaking the development and construction of a condominium building on the properties of Lobregat and LEI; that GMAI a corporation organized under Philippine laws was engaged by GMLC as Project Manager to oversee the conceptualization, development, construction and marketing of the building; that DVI is a corporation duly organized and existing under the laws of the Philippines; and that GMLC, LEI, Lobregat, GMAI and DVI entered into an Agreement dated July 1, 1997 in which they agreed on the following: "1. CONSTRUCTION OF THE BUILDING GMLC will develop and construct the Building in accordance with the agreed plans and specifications and shall engage such architects and contractors for the purpose. GMLC agrees to engage GMA as Project Manager to oversee the conceptualization, development and construction, and marketing of the Building. "2. PROJECT CONTRIBUTIONS "a. LEI and LOBREGAT will contribute the LEI Properties and the LOBREGAT Property, respectively, to the Project. In exchange for their respective property contributions, LEI and LOBREGAT will each acquire separate ownership of specifically designated floors and/or units and parking spaces in the Building listed and described in Annexes "F' and "G", respectively. "b. GMLC, GMA and DVI will contribute cash required to defray the development and construction costs of the Project and/or skills and expertise necessary for the development and construction of the Project. In exchange for their contributions, GMLC, GMA and DVI will each acquire ownership of specifically designated floors and/or units and parking spaces in the Building listed and described in Annexes "H", "I" and "J", respectively. "c. LEI and LOBREGAT agree to execute third party mortgages over their respective property contributions to secure loans obtained by GMLC for the Project. llcd "3. VALUATION OF CONTRIBUTIONS It is agreed that the parties will receive the above described shares of the floors and/or units and parking spaces in the Building in proportion to their respective contributions and as a mere return of capital. In view hereof, it is agreed that the value of the floors and/or units and parking spaces in the Building to be separately acquired by the parties shall correspond to the value of their respective contributions at the time these were made "4. PARTICIPATION OF PROJECT CONTRIBUTORS It is agreed that the participation of LEI, LOBREGAT and DVI as contributors to the Project shall be limited to their respective property or cash contributions LEI, LOBREGAT, and DVI shall not interfere with the conceptualization, development and construction of the Building, or the marketing of the Project for which GMLC and/or GMA as the Project Manager shall be jointly responsible. "5. DEEDS OF PARTITION OR ASSIGNMENT For the purpose of allocating to LEI, LOBREGAT, GMLC, GMA and DVI their respective shares in the total saleable area of the Project or in the unsold units in the Building, the parties concerned shall execute Deeds of Partition/Assignment specifically designating the floors and/or units and parking spaces in the Building to be separately acquired by such parties. The Deeds of Partition/Assignment shall adjudicate full and exclusive ownership over the floors and/or units and parking spaces in the Building to the parties to which these are allocated. The Deeds of Partition/Assignment shall be executed at such times to be agreed upon by the parties. "6. FORMATION OF CONDOMINIUM CORPORATION The Building shall be constituted as a condominium project under the Condominium Act (Republic Act No. 4726, as amended), and a condominium corporation shall be formed to hold title to the Properties and the common areas of the Project. For this purpose, Deeds of Conveyance transferring the Properties and the common areas of the Project to the condominium corporation shall be executed." In reply, please be informed as follows: 1. Pursuant to Section 22(B) of the Tax Code of 1997, the term corporation includes partnership, no matter how created or organized, joint stock companies, joint accounts ( cuentas en participacion ), 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. P.D. No. 929 amended the definition of the taxable corporation as not to include joint venture formed for the purpose of undertaking construction projects. The reasons for such amendment are: (1) Local contractors contribute substantially to the development program of the country; (2) Local contractors are at a disadvantage in competitive bidding with foreign contractors in view of limited capital and financial resources; (3) In order to be able to compete with big foreign contractors, it may be necessary for them to enter into joint ventures to pool their limited resources in undertaking big construction projects; (4) To assist them in achieving competitiveness with foreign contractors, the joint ventures formed by them should not be considered an additional income tax lien. Considering that it is the intention of the legislature to exclude joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, this Office is of the opinion as it hereby holds that the Joint Venture entered into by and between GMLC, LEI, Lobregat, GMAI and DVI is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The allocation of saleable area of the project between GMLC, LEI, Lobregat, GMAI and DVI in consideration of their respective contributions, as stipulated in the Agreement is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. However, upon the subsequent disposition by the co-venturers of the areas allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rates under Section 24 and 27(A) both of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, as further amended by Revenue Regulations No. 2-98. However, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the gross selling price, fair market value or zonal value of the properties, whichever is higher. 3. The Partition Agreement whereby GMLC, LEI, Lobregat, GMAI and DVI will allocate unto each other their share in the saleable area in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area between the parties, as the return of the capital which each contributed. 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 is without consideration and is not in connection with a sale, no income was generated and a fortiori , no creditable withholding tax and documentary stamp tax are payable and collectible. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. Finally, the Deed of Conveyance that will be executed transferring to the condominium corporation the management of the common areas of the aforesaid project will not be subject to creditable withholding tax pursuant to Section 57(B) in relation to Section 27 of the Tax Code of 1997. Neither is it subject to the documentary stamp tax imposed under Section 196 of the same Code, because conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable. But the notarial acknowledgment to said deed of conveyance is subject to the documentary stamp tax of P 15.00 pursuant to Section 188 of the Tax Code of 1997. 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)