Anna Celestina R. Cruz

July 9, 2008 BIR RULING [DA-(JV-003) 013-08] Section 22 (B); DA-409-2005 Anna Celestina R. Cruz 3-C Maliksi St., Piahan Quezon City M a d a m : This refers to your letter dated April 18, 2008 stating that on December 5, 2005, D.A. Muoz Co., D.M. Transit Corporation and D.M. Consortium, Inc. (the Landowners) entered into a Joint Venture Agreement (attached as Annex "A") with Sta. Lucia Realty and Development, Inc. (the Developer) for the development of the Owner's 54,821 sq.m. properties, covered by Transfer Certificate of Title Nos. 7438 (133997), 7439 (148018), 7440 (186232), 7441 (186409), 7442 (186410), 7444 (204491), 7445 (205084), 7443 (186411), 7460 (277943), 7461 (274892), 7462 (276937), 7446 (205041), 7447 (205049), 7448 (205050), 7449 (205056), 7450 (205057), 7451 (217779), 7452 (217780), 7453 (217781), 7454 (217782), 7455 (217783), 7456 (217784), 7457 (217785), 7458 (217786), 7459 (217787), with their respective areas in square meters, herein attached as Annex "A", all located in Quezon City, into a residential estate with a lot sharing of 60-40 in favor of the Developer for the resultant lots of the subdivision; that in accordance with the joint venture agreement, the Developer has caused the development of the properties and the project is now in the process of segregation and transfer of the corresponding share of the Developer in the resultant titles representing its share of the project; that a Sharing Scheme was already executed to transfer the corresponding share [from the Owner] of the Developer in the resultant subdivision lots; and that you now request for an opinion on the tax consequences of the following transactions: aTEADI 1. What would be the taxes involved when the Landowners transfer to the Developer its percentage share of total saleable lots for its development of the project? Would there be capital gains tax and documentary stamp tax (and if there are, how much) when the parties eventually execute a Deed of Assignment for the resultant lots in the project? 2. What would be the taxes involved when the parties eventually sell their respective shares of saleable lots to a third party? In reply, please be informed as follows: 1. Pursuant to Section 22 (B) of the Tax Code of 1997, as amended, 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 the clear provision of Section 22 (B) which clearly manifests the intention of the legislature to exclude from the definition of taxable corporation joint venture/s (or consortium) formed for the purpose of undertaking construction projects, this Office hereby confirms your opinion that the joint venture of D.A. Muoz Co., D.M. Transit Corporation and D.M. Consortium, Inc. and Sta. Lucia Realty and Development, Inc. is not a corporation subject to corporate income tax. However, for VAT purpose, the joint venture (or consortium) is by itself a taxable entity. aSIETH Moreover, the contribution of each of the parties to the joint venture is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax since the parties did not convey or transfer any ownership or interest when they contributed to the joint venture but merely pooled their resources to a common fund. The said contributions constitute their capital contribution to the joint venture project. The transfer is also not subject to value-added tax (VAT), since the transfers are not in the course of business but capital contributions. 2. The allocation of saleable lots of the Project between D.A. Muoz Co., D.M. Transit Corporation and D.M. Consortium, Inc., the landowners and Sta. Lucia Realty and Development, Inc. in consideration of their respective contributions 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 party has contributed. The Subdivision Contract whereby D.A. Muoz Co., D.M. Transit Corporation and D.M. Consortium, Inc. and Sta. Lucia Realty and Development, Inc. 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, as amended, 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. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997, as amended. 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 rate under Section 27 (A) of the Tax Code of 1997, as amended and to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR 6-2001. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended based on the gross selling price or fair market value of the properties whichever is higher. Likewise, the said sale shall 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. Furthermore, the parties to the joint venture agreement shall cause the Register of Deeds to annotate on the Transfer Certificate of Title or Condominium Certificate of Title, with respect to their respective allocated units/lots, that they hold said units/lots acquired in a tax-exempt joint venture pursuant to a Ruling issued by the Bureau of Internal Revenue. EHCDSI This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service