Bright Condo Residence Corporation

September 14, 2009 BIR RULING [DA-(JV-020) 537-09] 22 (B); 274-92; 010-96; DA286-98 Bright Condo Residence Corporation Centro Plaza Building No. 49 Scout Madrian cor. Scout Torillo Streets So. Triangle, Quezon City Attention: Mr. Francisco Tongson President Gentlemen : This refers to your letter dated March 30, 2009 stating that on March 26, 2009, Bright Condo Residences Corporation (BCRC) and individual members of the Punzalan Family entered into a Joint Venture Agreement (JVA) for the development of a parcel of land located in Barangay Laging Handa, South Triangle, Quezon City; that the members of the Punzalan Family, as landowner, contributed property with an aggregate area of 387 square meters, while BCRC agreed to improve an existing building and erect a low-rise, three-storey building, and to constitute the land and all improvements into a residential condominium; that BCRC also undertook the marketing and, in general, the management and operation of the project; that the expenses for the project development, for the titling, and marketing/management are for the account of BCRC; that the Condominium Certificates of Title (CCTs) over the individual condominium units, will be titled to the joint venture partners according to the sharing enumerated in a table provided for in Section 5 of the JVS; that the Torrens Certificate of Title (TCT) over the land, on the other hand, will be ceded and transferred by the members of the Punzalan Family to the non-profit Homeowners Condominium Corporation that is to be organized according to the provisions of Republic Act (RA) No. 4726; and that all condominium buyers are members of the Condominium Corporation. Based on the foregoing representations, you now request confirmation of your opinion that 1. The JV entered into by and between BCRC and the Punzalan Family does not create a separate taxable entity; 2. The allocation and distribution of the saleable units, as indicated in Section 5 of the JVA, to BCRC and the individual members of the Punzalan Family is not subject to income tax, expanded withholding tax (EWT), value-added tax (VAT) or gross receipts tax (GRT), and documentary stamp tax (DST); 3. The sale by BCRC or members of the Punzalan Family of their respective shares in the condominium units to third parties is generally subject to DST and VAT (unless exempt under Section 109 (w) of the Tax Code) and, in the case of individual members of the Punzalan Family, to final capital gains tax, while in the case of BCRC, to expanded withholding tax (unless exempt under RA No. 7279 on Socialized Housing and similar acts); 4. BCRC has been designated in the JVA as the exclusive marketing agent for the sale of all condominium units in the Project, and may act as a collection agent for members of the Punzalan Family. As such, BCRC may collect sales proceeds for all the units, both those it owns and those allocated to members of the Punzalan Family. Additionally, BCRC may withhold and remit the EWT in its own name for the sale of units allocated to it under the JVA. Where BCRC acts as the collection agent for members of the Punzalan Family, BCRC may issue receipts for the sale of units allocated to such members. For these receipts, BCRC shall not be liable for VAT or for income tax. These receipts shall be subject, at the hands of the individual members of the Punzalan Family, to capital gains tax on the sale and/or to income tax on any interest income relative to the sale. The individuals shall not be subject to VAT if they are not VAT-able entities; and 5. The Revenue District Office (RDO) having jurisdiction over the property is authorized to issue the Tax Clearance Certificate/Certificate Authorizing Registration (CAR) with regard to the sale of all saleable condominium units within the Project. ADcEST In reply thereto, please be informed that your opinion is hereby confirmed as follows 1. 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 BCRC and the Punzalan Family 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 individual income tax or corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. 2. The allocation and distribution of the respective shares of the Parties in the Project consisting of saleable units in consideration of their respective contributions, as stipulated in the JVA 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. 3. 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 value-added tax under Section 106 of the Tax Code of 1997, as amended by Republic Act No. 9337, as implemented by Revenue Regulations No. 16-2005, income tax/creditable withholding tax under Revenue Regulations No. 2-98, as amended, and to the corresponding documentary stamp tax prescribed in Section 196 of the Tax Code of 1997, as amended. However, upon subsequent sale by the Parties of their respective shares consisting of saleable units, the gain that may be realized by them from such sale will be subject to the regular individual income tax or corporate income tax under Sections 24 (A) or 27 (A) 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) 4. The JVA provides that the marketing shall be done exclusively by BCRC. The term "marketing" includes but is not limited to the determination of marketing policies, pricing, terms and conditions of sale, restrictions to be annotated on the titles of lots, documentation and collection of proceeds of sales. Accordingly, by virtue of the marketing provisions of the JVA, and considering that BCRC documents and issues all receipts and invoices relative to all sale in the entire project, BCRC may execute the Deed of Absolute Sale in its name in order to transfer title to the property in the name of the buyers with regards to its share in the saleable units as well as the share of the Punzalan Family. As such, the EWT may be credited in the name of BCRC. SCaDAE 5. 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) or 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 creditable 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 Transfer Certificate/s of Title 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 the parties to the joint venture shall inform the BIR, through the Law Division, of the fulfillment of the requirement on the distribution of the developed/saleable units in accordance with the allocated ratio in the Joint Venture Agreement. Provided finally, that each of the co-venturers shall report their income on the sale of the allocated developed units. For this purpose, a compliance report of the project indicating the number of units developed/built, respective TCTs/CCTs and the party in whose name the corresponding title was issued. 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. 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. ECaScD Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal & Inspection Group