Fifth Avenue Property Development Corp.

June 24, 2010 BIR RULING [DA-(JV-019) 106-10] Sec. 22 (B); BIR Ruling No. DA-373-2008; BIR Ruling No. DA-192-2001; BIR Ruling No. [DA-(JV-029) 223-08] Fifth Avenue Property Development Corp. No. 88 Labogon Road, Basak Mandaue City, Cebu Attention: Alan L. Dino Director Gentlemen : This refers to your letter dated January 5, 2010 requesting for an exemption from the payment of Capital Gains Tax (CGT) and Documentary Stamp Tax (DST) from the Joint Venture Agreement (JVA) for the development of a parcel of land situated in Lahug, Cebu City, into a condominium project. TSADaI It is represented that Spouses Michael Lloyd and Kristine Marie Dino and Fifth Avenue Property Development Corporation entered into a joint venture agreement on September 16, 2009; that the Spouses Michael Lloyd and Kristine Marie Dino (OWNER) owns a parcel of land (PROPERTY) situated in Lahug, Cebu City; that Fifth Avenue Development Corporation (DEVELOPER) has offered to develop the PROPERTY into a twelve (12) storey condominium project (PROJECT) and to provide the required funding, equipment materials, supplies, development works, management, labor supervision and related undertakings; that the DEVELOPER shall provide all the necessary funds, equipment, materials, supplies, development works expertise, management, labor supervision and related undertakings to develop and transform the PROPERTY into the PROJECT and to promote, market and sell the disposable units in the project; and that from the total saleable units of the PROJECT, the OWNER shall be entitled to a total of TEN PERCENT (10%) of the total disposable areas of the PROJECT, based on the selling price of the disposable units, the remaining NINETY PERCENT (90%) of the PROJECT will be given to the DEVELOPER. In reply thereto, 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 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 lien. Considering the clear provision of Sec. 22 (B) which 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 the OWNER and the DEVELOPER is not a corporation subject to corporate income tax. However, for VAT purposes, the joint venture (or consortium) still remains a taxable entity. The allocation of the developed PROJECT between the OWNER and the DEVELOPER, in consideration of their respective contributions, as stipulated in their agreement is not a taxable event 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). CcAIDa The Partition Agreement whereby the OWNER and the DEVELOPER will allocate unto each other their shares in the PROJECT 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 has 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. 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 or capital gains tax under Sections 24 (D) (1) and 27 (D) (5), as the case may be. Moreover, such sale shall be subjected to 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. Furthermore, the said sale shall likewise be subject to VAT. 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 Partition Agreement, without need of the presentation of proof of payment of the expanded withholding tax, value-added tax and the corresponding documentary stamp tax. Provided, that the parties to the joint venture shall cause the Register of Deeds to annotate on the TCTs/CCTs that a development project is being undertaken on the land and is the object of the joint venture agreement between the parties, and that the 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 saleable condominium units in accordance with the allocation ratio in the joint venture agreement. For this purpose, a compliance report of the project indicating the number of units developed/built, the respective TCTs/CCTs and the party in whose name the corresponding title was issued. (BIR Ruling No. DA-373-2008 dated June 19, 2008) 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner