Crown Asia Properties, Inc.

February 9, 2009 BIR RULING [DA-(JV-007) 072-09] 22 (B); DA-018-2006 Crown Asia Properties, Inc. Las Pias Business Center Alabang-Zapote Road, Talon Las Pias City Attention: Ms. Lea Harlea Chief Accountant Gentlemen : This refers to your letter dated November 5, 2008 requesting for confirmation of your opinion that: 1. The Land Development Agreement (LDA) executed by and between A.E.C. Realty & Development Corp. as the "LANDOWNER" and Crown Asia Properties, Inc. as the "DEVELOPER", for the development of five (5) parcels of land into a mixed-use residential and commercial subdivision, will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A), both of the National Internal Revenue Code (NIRC), as amended; 2. The allocation of the resulting saleable lots between the LANDOWNER and DEVELOPER in consideration of their respective contributions, as stipulated in the Deed of Partition, is not a taxable event and is not subject to income tax, and subsequently withholding tax, and the Value-Added Tax (VAT), since the allocation of saleable lots is in fact a mere return of capital that each has contributed; 3. The Deed of Partition whereby the LANDOWNER and DEVELOPER allocated unto each other their share in the resulting net saleable area in consideration of their respective contributions, is not subject to the Documentary Stamp Tax (DST) imposed under Section 196 of the NIRC, as amended, nor to any income tax, and consequently withholding tax, since the allocation is made without monetary consideration and is not in connection with a sale. Rather, the partition is made merely to segregate the resulting net saleable area between the parties, as the return of the capital which each contributed. However, it is understood that should the LANDOWNER and/or DEVELOPER sell any of the resulting net saleable area allocated to them, to third parties, the gain that may be realized from said sale will be subject to regular (corporate) income tax, in accordance with Section 27 of the NIRC, as amended by Republic Act No. 9337 and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as last amended by RR No. 30-2003. HDIATS Based on the representations, as well as from the documents submitted, the facts are as follows: On July 30, 2008, a Land Development Agreement ("LDA") was executed by and between A.E.C. Realty & Development Corp. (LANDOWNER) and Crown Asia Properties, Inc. (DEVELOPER). Pursuant thereto, the parties agreed that the LANDOWNER shall contribute five (5) parcels of land, with an aggregate area of 12,344.8 square meters, covered by TCT Nos. T-1232954, T-1232953, T-1232952, T-1232951 and T-1232950 to the joint venture project and the DEVELOPER shall undertake to develop the subject properties into a mixed-use residential and commercial subdivision. In reply, please be informed as follows: 1. The LDA executed between the LANDOWNER and DEVELOPER described above is an agreement between the parties for the subdivision and development of the aforementioned lots into a mixed-use residential and commercial subdivision 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 LDA (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the LDA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code, as amended. (BIR Ruling No. DA-303-2005 dated July 5, 2005) Section 22 (B) of the 1997 Tax Code, as amended, provides: "(B) The term 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 partnerships" 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." P.D. No. 928 amended the definition of the taxable corporation so 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. From the foregoing definition of a corporation, we confirm your opinion that the LDA 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, as amended. (BIR Ruling No. 002-97 dated January 14, 1997) aATHES 2. The allocation and distribution of the resulting net saleable area to the LANDOWNER and DEVELOPER in accordance with their respective equity contributions as stipulated in the Deed of Partition 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. Likewise, the said allocation and distribution is not subject to DST for want of consideration. It is to be understood, however, that upon subsequent disposition by the parties under the LDA of the resulting net saleable area 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 Section 27 (A) of the 1997 Tax Code, as amended by R.A. No. 9337, capital gains tax imposed under Section 24 (D) of the same Code, and to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code, as amended, 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, as implemented by RR No. 16-2005, as amended by RR No. 4-2007. (BIR Ruling No. DA-262-2001 dated December 18, 2001) 3. The Deed of Partition whereby the LANDOWNER and DEVELOPER have allocated unto each other their share in the resulting net saleable area in consideration of their respective contributions, are not subject to the DST imposed under Section 196 of the NIRC, as amended, considering that the allocation is made without monetary consideration and is not in connection with a sale. In this regard, 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 Deed of Partition was executed without consideration and was not in connection with a sale between the LANDOWNER and DEVELOPER, no DST is due and collectible on said Deed of Partition. However, we understand that the notarial acknowledgments to said Deed of Partition shall be subject to the DST pursuant to Section 188 of the NIRC, as amended, in the amount of P15.00. 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. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service