Sta. Lucia Realty & Development, Inc.

August 22, 2008 BIR RULING [DA-(JV-021) 174-08] 22 (B); DA (JV-007) 019-2008 Sta. Lucia Realty & Development, Inc. Ground Floor, The Sentinel Condominium Archbishop Reyes Avenue Banilad, Cebu City Attention: Mr. Gerardo D. Quintos Finance Officer Gentlemen : This refers to your letter dated May 4, 2008, requesting for a ruling that the assignment of the lots to Sta. Lucia Realty & Development, Inc. (SLRDI), pursuant to the Joint Venture Agreement (JVA) is not subject to capital gains tax and documentary stamp tax. DHATcE It appears that SLRDI, a domestic corporation entered into several JVA with the following owners: Name of Joint Venture Partner % of Sharing Location of Property TCTs covered Developer-Owner 1. Rene Espina, et al. 40-60 Punta Engao, Mactan, 7650, 34855 Lapu-Lapu City T-1300, T-1299 T-1278, T-1277 2. Cebu Discovery Bay Prop., Inc. 40-60 Punta Engao, Mactan, 15635 Lapu-Lapu City 3. Hanoverland Development Corp. 57-43 Sacsac, Consolacion, Cebu in the process (HDC) of transfer to HDC Among the terms and conditions of the JVA are as follows: a) That the Joint Venture partner would contribute to the developer its real properties situated at the afore-quoted areas; b) That SLRDI, would develop said real properties into a residential subdivision, all cost and expenses for the development would be at its sole account; c) That the resultant saleable lots or proceeds of the sale of the saleable area would be shared by each party based on their agreed sharing; d) That each parties has the free control and disposition in the sale of each share of the JVA. In order for the parties to completely exercise their respective rights to sell or dispose the lots as each share of the JVA, it is necessary that titles to lots being the share of SLRDI, the developer, be transferred to its name. Parties agree to execute the Sharing Agreement whereby the shares of the developer of the lots subject to the JVA would be assigned and titles thereto transferred to and registered in the name of SLRDI. Neither parties derived any profit or gain from the transfer as it is only made to segregate or apportion between themselves their shares of the developed lots, pursuant to the JVA. cTDIaC In reply, 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 tax 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 Owners and SLRDI is not a corporation subject to corporate income tax. However, for VAT purposes, the joint venture (or consortium) is by itself a taxable entity. (BIR Ruling No. DA-373-2008 dated June 19, 2008) The allocation of the resultant saleable lots or proceeds of the sale of the saleable area of the Project between the Owners and SLRDI, in consideration of their respective contributions, as stipulated in their agreement is not a taxable event and 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) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, 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 their parcel of land, the Owners, neither sell, barter, exchange goods, property nor render services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) DaAIHC The Sharing Agreement whereby the Owners and SLRDI will allocate unto each other their shares in the resultant saleable lots or proceeds of the sale of 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, 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 Sharing 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) or 27 (D) (5), whichever is applicable. Moreover, such sale shall be subject to the 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 property is located to issue the corresponding Certificate Authorizing Registration (CAR) and Tax Clearance Certificate (TCL) involving the transfer of the title to the parties based on their respective allocations pursuant to the Sharing Agreement, without need of 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 TCTs that a development project is being undertaken on the land and is the object of the JVA 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 developed/saleable lots in accordance with the allocation ratio in the JVA. For this purpose, a compliance report of the project indicating the number of lots developed, the respective TCTs and the party in whose name the corresponding title was issued. (BIR Ruling No. DA (JV-007) 019-2008 dated July 9, 2008) aSCDcH 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service