Atty. Alan B. Quintana

August 29, 2008 BIR RULING [DA-(JV-025) 189-08] 22 (B); DA-194-2006 Atty. Alan B. Quintana 2nd Floor, Renaissance Tower Meralco Ave., Pasig City S i r : This refers to your letter dated March 26, 2008 requesting for exemption from creditable withholding tax, documentary stamp tax and value-added tax on the partition and assignment of condominium units under a joint venture arrangement for a condominium development project in Barangay Matalahib, Quezon City. acEHCD It appears that Gregorio Araneta Management Corporation (GAMACOR) is the registered and legal owner of a parcel of land situated along Calamba St., Barangay Matalahib, Quezon City covered by Transfer Certificate of Title (TCT) N-270781 issued by the Registry of Deeds for Quezon City. Pursuant to a Project Agreement, GAMACOR entered into a joint venture arrangement with Fil-Estate Properties, Inc. (FEPI) for the development of the above-stated property into a residential-commercial condominium project. GAMACOR will contribute its landholding, while FEPI will finance and infuse technical and development works on the project as its capital contribution. By way of a return on their respective investments in the Project, the co-venturers agreed to share in the resulting saleable units allocated to them in accordance with their respective participation in the project (detailed list of the unit no., unit type and area subject to the joint venture agreement are attached hereto in ten (10) pages with the corresponding initials/signatures of the co-venturers authorized representative in every page thereof). You are now in the process of having the condominium titles issued and consequently, partitioning and assigning the condominium units between the parties representing their separate shares in the returns of the joint venture project. ESDcIA 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. SACEca Considering the clear 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 of GAMACOR and FEPI is not a corporation subject to corporate income tax. However, for VAT purposes, the joint venture (or consortium) is by itself a taxable entity. The allocation of the condominium units/parking slots of the project between GAMACOR and FEPI, 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 its parcel of land, GAMACOR, neither sell, barter, exchange goods, property nor render services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The Project Partition whereby GAMACOR and FEPI will allocate unto each other their shares in the subdivision lots 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 Project Partition is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997, as amended. ECaAHS 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 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 property is 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, 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/CCT 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 developed/saleable lots 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 slots, the respective CCTs and the party in whose name the corresponding title was issued. ACIDSc 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