Ms. Eufrocina B. Tarobal, CPA

January 7, 2010 BIR RULING [DA-(JV-001) 002-10] 22 (B); DA-373-2008; DA-247-2001; DA 262-2001 Ms. Eufrocina B. Tarobal, CPA 20 Pinaglabanan Extension, San Juan City Madam : This refers to your letter dated August 18, 2009 requesting for confirmation of your opinion that: 1. The Joint Venture Agreement (JVA), copy of which will be annotated at the back of the title to the PROPERTY, executed by Moldex Realty, Inc., (hereinafter referred to as the "DEVELOPER") with PURIFICACION MANALON, widow of deceased Rogelio Manalon and EDGARDO MANALON, married to Natalie Manalon, both of legal age, Filipino citizens and with common residence and postal address at Loma de Gato, Meycauayan, Bulacan, collectively referred to herein as the OWNERS, does not give rise to a taxable joint venture within the meaning of Section 22 (B) of the Tax Code, as amended. The JVA is subject only to the documentary stamp tax of P15.00 imposed on the notarial acknowledgment of the JVA under Section 188 of the Tax Code, as amended. 2. The allocation of the saleable lots from the PROJECT to the DEVELOPER commensurate to and in consideration of its contribution by way of the development of the PROPERTY referred to in the JVA 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 OWNERS to the PROJECT in the form of real property and the allocation of the subdivided lots among the DEVELOPER and the OWNERS in exchange for their respective contributions to the PROJECT is not subject to the capital gains tax imposed under Section 24 (D), as amended but only to the documentary stamp tax of P15.00 imposed on the notarial acknowledgment under Section 188 of the same Code. DTEAHI The facts, as represented, are as follows: 1. The OWNERS represent themselves to be the individual lawful and legitimate owners of a parcel of land situated at Barangay Loma de Gato, Marilao, Bulacan, with an aggregate area of FIFTEEN THOUSAND (15,000) SQUARE METERS, more or less, identified and more particularly described as follows: Lot 3818-A Transfer Certificate of Title No. T-544918 (M) Sps. Rogelio Manalon and Purificacion Manalon A parcel of land (Lot 3818-A of the subd. plan (LRC) Psd-156328, being a portion of lot 3818, Lolomboy Friar Lands Estate, LRC Rec. No. 8509), situated in the Bo. of Loma de Gato, Mun. of Marilao, Prov. of Bulacan, Island of Luzon. . . . containing an area of FIFTEEN THOUSAND (15,000) SQ. METERS, more or less. . . . 2. The OWNERS wishes to cause the development of the PROPERTY into a residential subdivision, referred to herein as the PROJECT, and incorporated as an additional phase and integral part of Heritage Homes Marilao, referred to herein as the SUBDIVISION; 3. The DEVELOPER, representing itself to possess the organizational and technical capability and relevant experience to undertake the desired development of the PROPERTY, and being confident of the feasibility and viability of the PROJECT, has proposed to the OWNER to undertake the complete development thereof; 4. Moldex Realty Marketing, Inc., ("MARKETING AGENT"), being likewise confident of the over-all marketability and salability of the PROJECT, has likewise proposed to the OWNERS to undertake the marketing and selling of all the saleable inventories in the PROJECT on an exclusive basis; 5. The OWNERS 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 the respective proposals for the development of the PROPERTY as an integral part of the PROJECT and the marketing and sale of the individual lots therein, subject to payment of compensation as spelled out in the JVA; HEacAS 6. For and in consideration of the foregoing premises, the parties have agreed and bound themselves to develop the PROPERTY and market and sell all saleable units of inventory that will be derived therefrom in a joint endeavor, with the OWNERS granting unto the DEVELOPER full and irrevocable rights, power and authority to subdivide and develop the entire property into a residential subdivision project as an additional phase and integral part of the SUBDIVISION, and likewise unto the MARKETING AGENT full rights, power and authority to market and sell on an exclusive basis, all the individual lots that will be derived from the PROJECT, which rights, power and authority the DEVELOPER and MARKETING AGENT have both accepted; 7. Based on the JVA, which shall be annotated in the title to the PROPERTY, it is the intention of the parties that to cause the development of the PROPERTY, the OWNERS will be contributing in the joint venture the PROPERTY, and the DEVELOPER the required development works. The parties have agreed to share in the net saleable area by assigning and transferring individual saleable lots with an aggregate area of forty per cent (40%) of the total saleable area to the OWNERS and the remaining sixty per cent (60%) to the DEVELOPER; 8. Immediately after the approval of the over-all subdivision plan for the PROPERTY and the verified survey report for and technical description of each lot therein by the Land Management Bureau (LMB) each of the said lots shall be individually registered with the Registry of Deeds of Cavite and titled under the name of the corresponding shareowner. All road lots and open spaces shall be titled under the joint ownership of the OWNERS and DEVELOPER to the extent of the sharing ratio stipulated in Art. IV of the JVA, Clause No. 22 thereof. The annotation on the mother title regarding the JVA shall cancelled automatically with the generation of the titles to the individual lots resulting from the subdivision of the PROPERTY; 9. The allocation and distribution of the individual subdivided lots to the co-venturers are mere return/distribution of their investments in the joint venture project and said transaction is not in the nature of a sale, barter, exchange and lease of goods and properties, rendering of service as defined under Section 105 of the 1997 Tax Code, as amended, Therefore, said transaction is not covered by value-added tax (VAT). However, the subsequent sale of the subdivided lots by the co-venturers to their respective customers are subject to VAT; aTHCSE 10. The contribution of land by the OWNERS to the PROJECT is likewise not subject to capital gains tax presumed to have been realized from the sale, exchange or other disposition of real property because there is not any transfer made in the course of business but only as capital contribution to the PROJECT; and 11. The subsequent disposition by the parties under the JVA of the lots allocated to them, and the gain that may be realized by them from such sale shall be subject to the regular income tax (in the case of the DEVELOPER) and the capital gains tax (in the case of the OWNERS). In reply, please be informed of the following: 1. The JVA, executed between Moldex Realty, Inc. as the DEVELOPER and the OWNERS, described above is an agreement between the parties to construct and fund the cost of construction of a residential subdivision 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 JVA (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the JVA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code. (BIR Ruling No. DA-247-2001 dated November 27, 2001) Section 22 (B) of the 1997 Tax Code provides: "(B) The terms corporation shall include partnerships, 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. "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 JVA 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) AcICHD 2. The allocation and distribution of the residential lots to the DEVELOPER and the OWNERS in accordance with their respective equity contributions as stipulated in the JVA 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 understood, however, that upon subsequent disposition by the parties under the JVA of the individual/subdivided lots allocated to them, the gain that may be realized by them from such sale shall be subject to the regular income tax rate provided under Sections 24 (A), 27 (A) of the 1997 Tax Code and to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended, whichever is applicable. Moreover, said sale shall be subject to the DST 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. 3. The contribution of the OWNERS to the PROJECT in the form of real property and the allocation of the subdivided lots among the DEVELOPER and OWNERS in exchange for their respective contributions, pursuant to the JVA are not subject to the capital gains tax imposed under Section 24 (D) of the 1997 Tax Code. The OWNERS 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 the course of business but a capital contribution. This will authorize the Revenue District Officer (RDO) of the revenue district where the property is located to issue the corresponding Certificate Authorizing Registration (CAR) and Tax Clearance Certificate (TCL) involving the transfer of the title to the parties based on their respective allocations pursuant to the Partition Agreement, without need of the presentation of proof of payment of the expanded withholding tax, VAT and the corresponding documentary stamp tax. Provided, that the parties to the joint venture shall cause the Register of Deeds to annotate on the TCT that a development project is being undertaken on the land and is the object of the joint venture between the parties, and that the aforestated joint venture is held to be a tax-exempt entity pursuant to this Ruling issued by this Office. Provided further, that parties to the joint venture shall inform the Bureau of Internal Revenue, through the Law Division, of the fulfillment of the requirement on the distribution of the lots in accordance with the allocation ratio in the JVA. For this purpose, a compliance report of the project indicating the number of lots developed/built, the respective TCTs and the party in whose name the corresponding title was issued. (BIR Ruling No. DA-373-2008 dated June 19, 2008) Finally, since under the JVA the MARKETING AGENT undertakes to market the individual lots by virtue of their agreement, the marketing fees derived therefrom shall be subject to income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended, and consequently, to the withholding tax imposed under RR No. 2-98, as amended, and to the VAT imposed under Section 108 of the same Tax Code. ADSTCa 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, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner