MJK Realty and Development, Inc.

August 20, 2008 BIR RULING [DA-(JV-020) 159-08] Section 22 (B); DA-409-2005 MJK Realty and Development, Inc. Recuerdo de Amor Memorial Gardens, Brgy. Poblacion, Norzagaray, Bulacan Attention: Maximiniano M. Alaba President Gentlemen : This refers to your letter dated April 29, 2008 stating that: 1. Sometime in 2005, Primitiva E. Rivera, Lorenza E. Rivera, and Ma. Rowena R. Marasigan (the Owners) entered into a Residential Subdivision Project Agreement with MJK Realty and Development, Inc. (the Developer) for the development of their 15,336 sq.m. property originally covered by 44 titles are now subdivided into 201 titles, attached hereto as ANNEX "A", all located at Brgy. Bunsuran, Pandi, Bulacan, into a residential estate with a lot sharing of 40-60 for the resultant lots of the subdivision; 2. 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 60% share of the project; and 3. A sharing was already executed to transfer the 60% share of the Developer in the resultant subdivision lots. ASIDTa that you now request for an opinion on the tax consequences of the following transaction: "1. What would be the taxes involved when Primitiva E. Rivera, Lorenza E. Rivera, and Ma. Rowena R. Marasigan (the Owners) transfer to MJK Realty and Development, Inc., its 60% share of total saleable lots for its development of the project? Would there be capital gains and documentary stamp taxes (and if there is, how much?) when the parties eventually execute a Memorandum of Sharing for the resultant lots in the project?" "2. What would be the taxes involved when the parties eventually sell their respective share of saleable lots to third party?" In reply, please be informed that pursuant to Section 22 (B) of the Tax Code of 1997, the term "corporation" includes 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. 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 as additional income tax lien. IaSAHC 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 Primitiva E. Rivera, Lorenza E. Rivera, and Ma. Rowena R. Marasigan and MJK 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. The assignment by the Owners to the Developer of its corresponding share of the resultant subdivision lots in the aforesaid project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the aforestated assignment is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The Memorandum of Sharing whereby the Owners and the Developer 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 because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Memorandum of Sharing is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, as amended, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing the parcel of land, the Owners, neither sell, barter, exchange goods, properties nor render service to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) SaHIEA It is understood however, that 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 creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 24 (D) (1), as the case may be. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, 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. 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 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