CKL Real Estate Corp.

September 15, 2009 BIR RULING [DA-(JV-021) 544-09] 22 (B); DA-373-2008 CKL Real Estate Corp. Cherry Court Bldg. Gen. Maxilom Ave. Cebu City Attention: Mr. Ken A. Salimbangon Chief Operating Officer Gentlemen : This refers to your undated letter requesting in effect, for an opinion on the exemption from payment of capital gains tax and documentary stamp tax on the development of several properties under a joint venture arrangement. Documents submitted show that Pilar Yap Elpa (Landowner) is the registered and absolute owner of three (3) parcels of land covered by Transfer Certificates of Title (TCT) Nos. 21765, 21766 and 21767 (Subject Properties) situated at Brgy. Mactan, Cebu City. On the other hand, CKL Real Estate Corp. (hereinafter the Developer) is a domestic corporation interested in developing the Subject Properties, horizontally and vertically, and has, for this purpose, offered to the Landowner to develop the same thru a Joint Venture Agreement (JVA) with the following terms and conditions: a) That the Landowner would contribute to the JVA its real properties; b) That the Developer would develop the Subject Properties into a residential subdivision (the Project) and all cost and expenses for the development would be at its sole account; IcEACH c) That the resultant saleable lots would be shared by each party in accordance with the following sharing agreement: Pilar Yap Elpa - 29% CKL Real Estate Corp. - 71% d) That each of the parties are in control with respect to the sale and disposition of their respective shares. In order for the parties to completely exercise their relevant rights to sell or dispose the lots as their share in the JVA, it is necessary that title to the lots being the share of the Developer be transferred in its name. Parties agree to execute the Sharing Agreement, whereby the shares of the Developer would be assigned and titles thereto will be transferred and registered in its name. Neither parties derived any profit or gain from the transfer as it is only made to segregate or apportion between themselves their shares on the developed lots. SHCaEA 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 Landowner and the Developer 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 lots in the Project between the Landowner and the Developer, 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) EcIDaA 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 service and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code, as amended. Hence, by contributing its parcels of land, the Landowner, neither sells, barters, exchanges goods, property nor renders service to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The Sharing Agreement whereby the Landowner and the Developer will allocate unto each other their shares 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 expanded withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 27 (D) (5), 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, 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 Sharing 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 TCT that a development project is being undertaken on the land and is the object of the joint venture between the parties, and that the aforestated 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 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/built, the respective TCTs and the party in whose name the corresponding title was issued. (BIR Ruling No. DA-373-2008 dated June 19, 2008) EHaCTA 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, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner