Central Country Estate, Inc.

December 6, 2007 BIR RULING [DA-614-07] Sec. 22 (B) DA-450-2004 Central Country Estate, Inc. Unit 3, 3/F Corporate House Building 239 Santolan Road cor. C. Benitez St. Quezon City Attention: Ma. Elena Ongkiko-Santos Chief, Finance Officer Gentlemen : This refers to your letter dated November 15, 2007, requesting confirmation of your opinion that the assignment of the lots to CENTRAL COUNTRY ESTATE, INC., pursuant to the Joint Venture Agreements is not subject to the capital gains tax or the documentary stamp tax. ScaCEH It is represented that CENTRAL COUNTRY ESTATE, INC. (CCEI, for short) is a domestic corporation with office address at Hotel Graceland, San Fernando, Pampanga; that it had entered into various Joint Venture Agreements with the following: Name of Joint Venture % of Location of Property Partner Sharing 1. Danielo Naguit, et al. 60%-40% Nueva Victoria, Mexico, Pampanga 2. Noel Nucup, et al. 60%-40% Panipuan, Mexico, Pampanga 3. Sps. Edwin & Susana Bulaon 60%-40% Divisoria, Mexico, Pampanga whereby the former would develop the real properties of its joint-venture partners; that among the terms and conditions of the Joint-Venture Agreements are: a) That the Joint-venture partners shall contribute their real properties to the developer; b) That CCEI shall develop said real properties into a residential subdivision and that all cost and expenses for the development shall be for its sole account; c) That the resultant saleable lots would be shared by the partners; d) That the above-mentioned parties shall have control and disposition in the sale of their respective shares in the Joint Venture Agreement; and that similar to any other Joint Venture Agreements, upon the completion of the aforesaid projects, ownership of the lots will be apportioned between the individual landowners and the herein developer, CCEI, as their respective shares in such joint-venture undertaking. In reply, please be informed as follows: 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 so as not to include a 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 subjected to additional income taxes. 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 CCEI and the landowners is not subject to the regular corporate income tax under Section 27 (A) of the Tax Code of 1997. The allocation of saleable units of the project between the landowners and CCEI, in consideration of their respective contributions, as stipulated in this 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. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing the parcels of land, the landowners neither sell, barter, exchange goods or property nor render services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) The Sharing Agreement whereby the landowners and CCEI will allocate unto each other their share in the net 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 has contributed. However, the acknowledgment to said Sharing Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. aEcSIH It is understood however, that upon 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 creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001. Moreover, such 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 or fair market value of the properties, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. 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 will be considered null and void. ESIcaC Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service