Gerodias Suchianco Estrella

August 28, 2008 BIR RULING [DA-(JV-023) 178-08] 22 (B); DA-455-2007; DA-506-2005 Gerodias Suchianco Estrella Suite 2404 Discovery Center, 25 ADB Avenue Ortigas Center Pasig City Attention: Attys. Raul G. Gerodias and Grace Patricia Vilchez-Custodio Gentlemen : This refers to your letter dated July 18, 2008 requesting on behalf of your client, JTKC Land, Inc. (JTKC), for a ruling confirming the various tax consequences arising from the development and construction of a condominium project. EAIcCS The facts as you represented are as follows: a. Aldex Realty Corporation (Aldex) is the absolute and registered owner of two (2) parcels of land located at Apartment Ridge Row, Ayala Avenue, Makati City with a total area of Four Thousand Eighty-Seven (4,087) square meters, more or less, and covered by and more particularly described in Transfer Certificates of Title Nos. 173683 and 173684 issued by the Registry of Deeds for Makati City (collectively, the "Property") which shall be developed into a high-end residential condominium building with service apartments to be known as "Discovery Primea" ("Condominium Project"). JTKC is a corporation duly organized and existing under the laws of the Republic of the Philippines, and is engaged in the business of acquiring, developing and selling real estate, including commercial lots and residential condominiums. b. Aldex and JTKC entered into a Joint Venture Agreement whereby Aldex commits to contribute the Property as its capital contribution to the Condominium Project. In consideration of such capital contribution, Aldex shall be entitled to a pro rata ownership share in the Project, specifically full ownership to the service apartments consisting of 142 units on 12 floors and 381 parking spaces appurtenant thereto. JTKC, on the other hand, commits to develop the Property into the Condominium Project. As a return of capital, JTKC shall be entitled to full ownership of the residential units in the Condominium Project. c. Further, investors shall enter into a Project Investment Agreement with JTKC. The Project Investment Agreement between JTKC and the Investors provides that each Investor commits to invest in the Condominium Project through a capital contribution for the financing and/or funding of the Condominium Project in an amount equivalent to a percentage share in the total cost of development of the Condominium Project. The share of the Investor will be computed based on the estimate of the actual cost of the floor area of a particular condominium unit, subject to any cost adjustment arising from changes in the actual cost and/or the floor area. In return for his capital contribution each Investor will receive the corresponding Condominium Certificates of Title (CCTs) for the condominium unit and its appurtenant parking spaces. d. JTKC shall deposit the Investor's capital contribution and any additional contributions in a risk-free money market placement with a reputable bank acceptable to both JTKC and the Investor. JTKC shall open an account for each Investor. All contributions by the Investor will be held, managed and disbursed by the bank which shall hold in trust the capital contribution for each Investor. Prior to the construction of the Project, every Investor shall deposit Ten Percent (10%) of his required capital contribution to the bank account. Investor will then deposit the remaining Ninety Percent (90%) through internally generated funds and/or by availing of a construction credit line during the construction period. Upon completion of the Project, any excess funds or properties of the bank account, including ownership over the condominium units and its appurtenant parking spaces, shall be released to the Investors. The bank shall review and approve all disbursements for the Condominium Project for the account of the Investor, and shall hold custody of any and all documents relating thereto. Upon approval of each disbursement, the bank shall debit from the bank account of the Investor the pro rata share of the Investor in such disbursement and issue a check payable directly to the approved payee thereof. e. JTKC shall be the Project Manager of the Condominium Project. It will be authorized to, among others, negotiate and execute contracts as may be required for the development of the Condominium Project with architects, construction management engineers, general building contractors, and other parties deemed fit and necessary by JTKC for the construction of the Condominium Project; to do the marketing and advertising of the Condominium Project concept; to secure sufficient number of Investors; to secure the necessary permits and licenses that may be required; and to do other acts necessary in the expeditious development of the Condominium Project. In return, JTKC will receive a management fee. AHSEaD f. Prior to the completion of the Condominium Project, an Investor can assign its/his participation, rights and proportionate interest in the Condominium Project provided it/he secures the written consent of JTKC. g. Upon completion of the Condominium Project, Aldex, the Investors and the buyers of condominium units in the Condominium Project will form a condominium corporation for the purpose of holding title to, managing and maintaining the land and the common areas of the Condominium Project pursuant to the provisions of the Condominium Act. Subsequently, the ownership of the common areas will be conveyed to the condominium corporation. You now request for confirmation of the following: 1. The Joint Venture Agreement and the Project Investment Agreements will not give rise to separate taxable joint ventures within the meaning of Section 22 (B) in relation to Section 27 (A) of the 1997 Tax Code, as amended. Hence, the unincorporated joint ventures created by the parties are not subject to the corporate income tax under Section 27 of the 1997 Tax Code. 2. The conveyance of the parcel of land from Aldex to the condominium corporation as its capital contribution is not subject to income tax/creditable withholding tax and value-added tax (VAT). 3. The assignment of rights by an Investor with respect to the Project Investment Agreement between JTKC and an Investor is not subject to capital gains tax, creditable withholding tax, VAT and documentary stamp tax under Section 196 of the Tax Code of 1997. 4. The distribution of the condominium units and appurtenant parking slots to Aldex, JTKC and the Investors, as a return of their capital contributions, is not subject to income tax, capital gains tax, creditable withholding tax, VAT and documentary stamp tax under Section 196 of the 1997 Tax Code. 5. The conveyance of the common areas in the condominium without any monetary consideration to a condominium corporation is not subject to income tax, VAT and documentary stamp tax under Section 196 of the same Code. ADcHES In reply, please be informed 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. 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 provision of Sec. 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 by and among Aldex, JTKC and the Investors is not a corporation subject to corporate income tax. (BIR Ruling No. DA-506-2005 dated December 16, 2005) However, for VAT purposes, the joint venture (or consortium) is by itself a taxable entity. 2. The conveyance of the parcel of land from Aldex to the condominium corporation as its capital contribution is not subject to income tax/creditable withholding tax and value-added tax (VAT). The conveyance of the parcel of land from Aldex to a condominium corporation as its capital contribution to the Project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax. The conveyance of the property is merely a capital contribution to the joint venture and therefore, not a taxable event. The conveyance is likewise not subject to VAT because VAT is imposed on any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, or imports goods as stated in Section 105 of the Tax Code of 1997. The contribution by Aldex of its parcels of land is by way of capital contribution and not by way of sale, barter or exchange of goods or property nor rendering of service or importation of goods and as such, the transaction is not subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) CIHAED 3. The assignment of rights under the Project Investment Agreement by an Investor is not subject to capital gains tax, creditable withholding tax, VAT and documentary stamp tax under Section 196 of the 1997 Tax Code, as amended. The transaction is not deemed a sale or assignment of real property. Rather, the transaction is a mere assignment of rights whereby the assignee merely steps into the shoes of the assignor without acquiring a better right than what the assignor had in the property to which the rights assigned pertains. A deed of assignment of rights in real property is not a deed of sale of real property itself but only the rights pertaining to such property. (BIR Ruling No. DA-506-2005 dated December 16, 2005) 4. The consequent allocation and delivery of serviced apartments to Aldex and residential condominium units to JTKC and the Investors, and their appurtenant parking spaces, in consideration of their respective contributions, as stipulated in the Joint Venture Agreement and the Project Investment Agreements, respectively, is likewise not a taxable event. The delivery of the properties 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-455-2007 dated August 17, 2007) cASIED The transaction is neither in the nature of a sale, barter, exchange or lease of goods and properties, or rendering of services, or importation of goods as defined under Section 105 of the Tax Code of 1997 and therefore, not subject to VAT under Sections 106 and 108 of the same Tax Code. The Partition Agreement allocating to Aldex, JTKC and the Investors their respective units in the Project 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 among the parties as the return of the capital which each has contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997, as amended. However, upon the subsequent disposition by Aldex and JTKC of the areas allocated to them, being corporations engaged in real estate development, 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, and VAT. The sale of the unit or parking space by the Investor (either an individual or corporation not engaged in real estate development) shall be subject to capital gains tax under Sections 24 (D) (1) or 27 (D) (5) based on the gross selling price or fair market value of the properties, whichever is higher. Consequently, all such sales 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. 5. Conveyances of realty, not in connection with a sale, to trustees or other persons without consideration are not taxable. Thus, the transaction transferring to the condominium corporation the management of the common areas of the Project will not be subject to creditable withholding tax pursuant to Section 57 (B) in relation to Section 27 of the Tax Code of 1997. Neither is it subject to the documentary stamp tax imposed under Section 196 of the same Code. (BIR Ruling No. DA-506-2005 dated December 16, 2005) 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 Project Partition, without need of the presentation of proof of payment of the creditable withholding tax, VAT 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 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 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 units/parking spaces in accordance with the allocation ratio in the joint venture agreement. For this purpose, a compliance report of the project indicating the number of units/parking spaces, the respective CCTs and the party in whose name the corresponding title was issued. (BIR Ruling No. DA (JV-007) 019-2008 dated July 9, 2008) 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