DMC Urban Property Developers, Inc.

January 28, 2010 BIR RULING [DA-(JV-007) 015-10] 22 (B); DA-373-2008; DA-247-2001; DA 262-2001 DMC Urban Property Developers, Inc. 2/F 2281 Chino Roces Ave. Makati City Attention: Mr. Joy B. Fajardo Accounting Officer Gentlemen : This refers to your letter dated September 16, 2009 requesting for a ruling that (1) the joint venture formed by Dacon Corporation and DMC Urban Property Developers, Inc. (DMC-UPDI) for the purpose of developing and constructing a condominium project does not fall within the definition of a corporation pursuant to Sec. 22 (B) of the 1997 Tax Code, hence it is not subject to the corporate income tax provided under Sec. 27 (A) of the Tax Code of 1997, and (2) that the allocation of condominium units and parking spaces and the issuance of the corresponding Condominium Certificates of Title (CCTs) to Dacon Corporation and DMC-UPDI representing their respective interest in the project are not subject to income and/or creditable withholding tax (CWT) because it is only upon the sale or disposition to third parties of the units and parking spaces allocated that the gain realized in the said transaction will be subject to the regular income tax liability under Sec. 27 (A) of the 1997 Tax Code and to the CWT under Revenue Regulations (RR) No. 2-98; and (3) that the joint venture is exempt from the payment of documentary stamp tax and value-added tax (VAT). It appears that Dacon Corporation is an entity duly organized and existing under and by virtue of the laws of the Philippines. It is the registered owner of two (2) parcels of land with an aggregate land area of ten thousand seven hundred forty three (10,743 sq.m.), more or less, as evidenced by Transfer Certificates of Title Nos. T-55792 and T-55793 of the Registry of Deeds for Davao City. On the other hand, DMC-UPDI is likewise a corporation created under Philippine laws and is engaged in property development and construction business. As stipulated in the Joint Venture Agreement (JVA) of December 4, 2007 entered into by Dacon Corporation and DMC-UPDI as landowner/co-developer and developer, respectively, the former shall contribute the above parcels of land plus development and construction funds, whereas, the latter shall provide development and construction costs of the subject properties into a condominium project known as Magallanes Residences (the "Project"). As a return for their respective contributions to the Project, the salable condominium units and parking spaces in the Project shall be allocated to DMC-UPDI and Dacon Corporation on a 60%-40% basis, correspondingly. In reply, please be informed of the following: TSIEAD 1. The JVA executed between Dacon Corporation and DMC-UPDI is an arrangement between the parties to construct, develop and fund the cost of building a residential condominium project which is neither a contract of sale a over real property nor an instrument which conveys title to real property. Hence, no income tax or 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). Furthermore, Sec. 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 said 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", and as such not subject to the corporate income tax imposed under Sec. 27 (A) of the 1997 Tax Code. (BIR Ruling No. 002-97 dated January 14, 1997) 2. The allocation and distribution of the saleable condominium units and parking spaces to Dacon Corporation and DMC-UPDI 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/distributions 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 units and parking slots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rate provided under Sec. 27 (A) of the 1997 Tax Code, as amended, capital gains tax imposed under Sec. 27 (A) of the same Code, and to the CWT under RR No. 2-98, as amended. 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. (BIR Ruling No. DA-262-2001 dated December 18, 2001) ICTDEa 3. The contribution of Dacon Corporation in the form of real property and the allocation of the saleable condominium units and parking slots among Dacon Corporation and DMC-UPDI in exchange for their respective contributions, pursuant to the JVA are not subject to the capital gains tax imposed under Sec. 27 (A) of the 1997 Tax Code. Dacon Corporation did not convey or transfer its ownership or interest over its real properties when it contributed the aforesaid parcels of land to the joint venture but merely pooled their resources into a common fund. The said contribution constituted the parties 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, CWT and capital gains tax because the transfer or conveyance is not in the course of business but a mere capital contribution. (BIR Ruling No. DA 262-2001 dated November 18, 2001) This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Certificate Authorizing Registration (CAR) and Tax Clearance Certificate (TCL) involving the transfer of the titles to the parties based on their respective allocations pursuant to the Deed of Partition, without need of the presentation of proof of payment of the expanded withholding tax, VAT and the corresponding DST. Provided, that the parties to the joint venture shall cause the Register of Deeds to annotate on the TCTs 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 units and parking slots in conformity with the allocation ratio in the JVA. For this purpose, a compliance report of the project indicating the number of units and park slots developed/built, the respective CCTs 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, DMC-UPDI undertakes to market the condominium units, the marketing fees derived therefrom shall be subject to income tax imposed under Sec. 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 Sec. 108 of the same Tax Code. 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