V.C. Mamalateo & Associates

September 9, 2009 BIR RULING [DA-(JV-019) 510-09] 22 (B); 274-92; DA268-98 V.C. Mamalateo & Associates Unit 6C, 20 Lansbergh Place 170 T. Morato Avenue Quezon City Attention: Atty. Carmencita P. Victorino Partner Gentlemen : This refers to your letter dated March 17, 2009 stating that your client, Duraville Realty & Development Corporation (Duraville), is a corporation organized and existing under the laws of the Philippines; that it is organized primarily to acquire by purchase, lease, donation or otherwise, and to own, use, improve, develop, subdivide, sell, mortgage, exchange, lease, develop and hold for investment or otherwise, real estate of all kinds, whether improve, manage or otherwise dispose of buildings, houses, apartments and other structures of whatever kind, together with their appurtenances and with principal office at Mary Cris Complex Commercial Center, Mary Cris Complex Subdivision, Pasong Camachile 2, General Trias, Cavite City; that Duraville is the registered and legal owner of a parcel of land in San Francisco de Malabon estate situated at Barangay San Gabriel, Gen. Trias, Cavite, containing an area of 22,507 square meters covered by TCT No. T-1092322; that on the other hand, Celia K. Sy, Jennifer S. Bongat-Lim, Benson L. Perelonia and Jefferson S. Bongat (Landowners) are registered and legal owners of several parcels of land in San Francisco de Malabon estate situated at Barangay San Gabriel, Gen. Trias, Cavite, herein described as follows: DHEACI Name TCT No. Area/sq.m. Celia K. Sy T-1171320 19,602 Jennifer S. Bongat-Lim T-1214747 16,383 Benson L. Perelonia T-1214746 1,099 Benson L. Perelonia T-1214745 18,588 Benson L. Perelonia T-1214744 4,987 Jefferson S. Bongat T-1092321 16,184 Jefferson S. Bongat T-1092320 15,623 that on March 13, 2009, Duraville, as Developer, and the Landowners executed a Joint Venture Agreement (JVA) wherein they agreed to consolidate the above-mentioned properties in San Francisco de Malabon estate situated at Barangay Pasong Camachile 2 (San Gabriel), Gen. Trias, Cavite, to be developed as a residential subdivision which shall be named as Wellington Place at Mary Cris Complex Phases 6, 7, 8 & 9; that in the subject JVA, the Developer and Landowners agree, among others, to share the estimated recoverable saleable lots 61,557 square meters more or less on a (70%-30%) percent basis proportionate to the respective landholdings of the Landowners and the property of the Developer; that also the Developer and Landowners agree that all alleys, bridge lots, community facilities, creek lots, drain alleys, easements, excluded areas, open spaces, reserved areas and road lots areas totaling 53,396 square meters, are to be registered in the name of the Developer; that the Landowners, by virtue of the JVA, irrevocably constitute, name and appoint Developer or its authorized representatives as their Attorney-in-Fact, with full power and authority to exercise the following: 1. Sign any and all documents pertaining to this project and the applications for clearance, permit or license and certificate of registration with the concerned local or national government agencies; 2. To sell the lots covered by derivative titles of the above-mentioned consolidated properties including to sign contracts to sell, deeds of absolute sale and other pertinent document; 3. To sue and be sued to protect the rights and interests of the Developer and Landowners on their respective share. The costs of suit, including acceptance and attorney's fees shall be shared equally between the Landowner/s concerned and the Developer. Moreover, it is provided that: 1. Upon approval of the consolidated subdivision plan and prior to the issuance and release of the individual titles of the subdivision lots, the Landowners, their heirs and assigns shall execute the Deed of Partition in favor of the Developer of its corresponding share in the joint venture. This sharing is subject to adjustment upon final approval of the consolidated subdivision plan survey; 2. The Landowners shall have the option to authorize the herein Developer to sell their respective share in the joint venture and to receive the net proceeds thereof; 3. All operating and administrative expenses incurred during the land development and housing construction of the project shall be for the sole account of the Developer; aHSAIT 4. The Developer shall own exclusively the housing units to be constructed thereon and shall be entitled to the proceeds thereof, regardless of whether the lots on which the housing units are built pertain to the share of either Developer and Landowners, but the value of the saleable lot is subject to the sharing agreement herein provided; 5. The Developer shall have the exclusive authority to operate and manage the subdivision development and handle the marketing of all lots and housing units. Also, the Developer and Landowners agreed to market all the saleable lots and housing components thru brokers and agents and the expenses shall not be more than ten (10%) percent of the gross selling price including commissions. Based on the foregoing representations, you now request for confirmation of your opinion on the following: 1. The JVA executed between the Developer and Landowners described as an agreement between the parties therein for the subdivision and development of the aforementioned lots into a residential subdivision 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 Tax Code of 1997; 2. Pursuant to Section 22 (B) of the Tax Code of 1997, the JVA executed between the parties does not give rise to a taxable joint venture. The parties to a JVA 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 said Code; HSTCcD 3. The allocation and distribution of the resulting net saleable area to the Developer and Landowners 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; 4. Likewise, the said allocation and distribution is not subject to DST for want of consideration; 5. However, upon subsequent disposition by the Developer and Landowners under the JVA 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 Tax Code of 1997, as amended by Republic Act (RA) No. 9337, capital gains tax imposed under Section 24 (D) of the same Code, and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 30-2003. Moreover, said sale shall be subject to the DST 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 value-added tax (VAT), as implemented by Revenue Regulations No. 16-2005, as amended by Revenue Regulations No. 4-2007; aHCSTD 6. The Deed of Partition whereby the Developer and Landowners 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 Tax Code of 1997, as amended, considering that the allocation is made without monetary consideration and is not in connection with a sale. However, the notarial acknowledgment to said Deed of Partition shall be subject to the DST pursuant to Section 188, supra . 7. 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 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 BIR. In reply thereto, pwwlease be informed that your opinion is hereby confirmed as follows 1. The JVA executed between the Developer and Landowners described as an agreement between the parties therein for the subdivision and development of the aforementioned lots into a residential subdivision is neither a contract of sale over real property nor an instrument which conveys title to real property. Consequently, 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 Tax Code of 1997; 2. 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. It is to be emphasized, however, that P.D. 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 that it is the intention of the legislature to exclude joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, this Office holds that the JVA entered into by Duraville, as Developer and the Landowners is not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax or individual income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. CAIHTE 3. The allocation and distribution of the respective shares of the Parties in the Project consisting of lots in consideration of their respective contributions, as stipulated in the Agreement is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. 4. The allocation and distribution of their shares is not subject to DST imposed under Section 196 of the Tax Code of 1997. 5. Moreover, upon subsequent disposition or sale by the Developer and Landowners of their respective shares consisting of lots, the gain that may be realized by them from such sale will be subject to the regular corporate income tax under Section 27 (A) or capital gains tax imposed in Section 24 (D) of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended, and to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, and to the value-added tax imposed under R.A. No. 9337, as implemented by Revenue Regulations No. 16-2005, unless exempt under Section 109 (w), supra . (BIR Ruling Nos. 274-92 dated September 30, 1992; 010-96 dated January 23, 1996; BIR Ruling Nos. DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998) However, considering that the ownership of the housing units to be constructed on the lots pertain to the share of the Developer or Landowners, the transfer of the said units built/constructed is nonetheless subject to regular corporate income tax, VAT and DST. 6. The Deed of Partition to be executed by the Parties whereby they allocate and distribute between them their respective shares in the Project in exchange for their respective contributions is without monetary consideration is not subject to the corresponding documentary stamp tax prescribed in Section 196 of the Tax Code of 1997, as amended. However, the notarial acknowledgment is subject to the P15.00 documentary stamp tax prescribed in Section 188, supra . CaEATI 7. 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. Likewise, the parties to the JVA shall cause the Register of Deeds concerned to annotate at the back of the TCTs with respect to their allocated units/lots, that they hold said units/lots acquired in a tax exempt JVA. 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 Legal & Inspection Group