Filinvest Land, Inc.

September 23, 2008 BIR RULING [DA-(JV-031) 251-08] 22 (B); DA-586-2007 Filinvest Land, Inc. 173 P. Gomez St. San Juan, Metro Manila Attention: Atty. Juan R. Bernardino, Jr. Tax Counsel Gentlemen : This refers to your letter dated August 29, 2008 requesting for a ruling on the tax consequences of the Development Agreement executed by and among Filinvest Land, Inc. ("FLI" for brevity) and Antonio Carlos Villa-Abrille Llamas, Maria Loreto V. Abella-Lopez, Antonio Villa-Abrille Tan, Milagros R. Villa-Abrille, Natividad V.A. Jaroda, Teresita R. Villa-Abrille, The Heirs of Adela Villa-Abrille, Reynaldo V.A. Coronel, Emmanuel Coronel, Sr., Cynthia C. Hardy, Abel V.A. Coronel, Emmanuel V.A. Coronel, Jr., Kenneth V.A. Coronel, The Heirs of Consejo V.A. Tan, The Heirs of Lourdes V. Abella, The Heirs of Jose R. Villa-Abrille, The Heirs of Julia V.A. Llamas, The Heirs of Luis R. Villa-Abrille and the Heirs of Reynaldo Q. Villa-Abrille (hereinafter referred to as the "Owners") for the development of a residential subdivision. It appears that FLI is a corporation duly organized and existing under the laws of the Philippines and is engaged in the business of acquiring, developing and selling real estate, including residential subdivisions. On the other hand, the Owners are the registered owners of four (4) parcels of land (the "Property") covered by Transfer Certificates of Title No. T-181221, T-19482, T-19483 and T-180104 with an aggregate area of 154,756 sq.m., more or less, and are all located in Barangay Ma-a, Davao City. On August 27, 2005, FLI as the developer, entered into a Development Agreement with the Owners for the subdivision and horizontal development of the real properties aforementioned. The salient portions of the said Development Agreement are as follows: 1. FLI shall undertake the subdivision and horizontal development of the subject Property, a residential project, which development shall include improvements and facilities as agreed upon in the Master Plan for Development ("Plan"); 2. FLI shall shoulder all the equipment, engineering and labor expenses incurred relative to the subdivision and horizontal development of the Project; 3. For and in consideration of the development obligations and undertakings it will assume, FLI will receive fifty-three percent (53%) of the saleable lots which shall result from said subdivision and horizontal development. The remaining forty-seven percent (47%) shall be retained in ownership by the Owners; and ScHADI 4. Upon approval of the subdivision plan by the proper government agencies, the parties shall allocate the saleable units in accordance with their aforesaid sharing, in the most equitable and practical way possible, with due consideration and regard to the terrain, location, and projected values of such units. Upon completion of the afore-mentioned Property, FLI and the Owners entered into a Partition Agreement, whereby the developed saleable lots were allocated between themselves, based on the terms of the Development Agreement previously executed. The said Partition Agreement adjudicated the saleable lots between the parties, as part of their respective shares in the Project and to allow the registration of said allocated saleable lots in their respective names. Based on the foregoing, you now request for confirmation that: 1. The Development Agreement between FLI and the Owners, for the subdivision and horizontal development of the Property, will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A), both of the Tax Code of 1997; 2. The allocation of saleable lots between FLI and the Owners in consideration of their respective contributions, as stipulated in the Development Agreement, is not a taxable event and is not subject to income tax, and subsequently to withholding tax and the Value-Added Tax (VAT), since the allocation of saleable lots is in fact a mere return of capital that each has contributed; THESAD 3. The Partition Agreement whereby FLI and the Owners allocated unto each other their share in the saleable lots in consideration of their respective contributions is not subject to the Documentary Stamp Tax (DST) imposed under Section 196 of the NIRC, as amended, nor to any income tax, and consequently withholding tax, since the allocation is made without monetary consideration and is not in connection with a sale. Rather, the partition will be made merely to segregate the saleable lots between the parties, as the return of the capital which each contributed. However, it is understood that should FLI and/or the Owners sell any of the saleable lots allocated to them, to third parties, the gain that may be realized from said sale will be subject to regular (corporate) income tax at 35%, in accordance with Section 24 of the NIRC, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. We reply as follows: 1. The Development Agreement executed between FLI and the Owners described above is an agreement between the parties for the subdivision and development of the aforementioned Property into a residential subdivision which is neither a contract of sale over real property nor an instrument which conveys title to real property. Hence, no income tax or documentary stamp tax (DST) is due upon the execution of the Development Agreement (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the Development Agreement is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code, as amended. (BIR Ruling No. DA-303-2005 dated July 5, 2005) Section 22 (B) of the 1997 Tax Code, as amended, provides: "(B) The term corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participation), 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. "General professional partnership" are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." 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. HcDaAI From the foregoing definition of a corporation, this Office is of the opinion that the Development Agreement executed between the parties does not give rise to a taxable joint venture. The parties to a joint venture agreement may file separate income tax returns for their net revenue for the above-mentioned project less their respective proportionate share in the joint venture expenses since the joint venture is not embraced within the meaning of the term "corporation", hence, not subject to the corporate income tax imposed under Section 27 (A) of the 1997 Tax Code, as amended. (BIR Ruling No. 002-97 dated January 14, 1997) 2. The allocation and distribution of the saleable lots to the Owners and FLI in accordance with their respective equity contributions as stipulated in the Partition Agreement is not subject to income tax, withholding tax or capital gains tax, since the allocation/distribution is without consideration, not in connection with a sale and constitutes mere return of capital. Likewise, the said allocation and distribution is not subject to DST for want of consideration. It is to be understood, however, that upon subsequent disposition by the parties under the Development Agreement of the individual/subdivided lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rate provided under Section 27 (A) of the 1997 Tax Code, as amended by R.A. No. 9337, capital gains tax imposed under Section 24 (D) of the same Code, and to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code, 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, as implemented by RR No. 16-2005, as amended by RR 4-2007. (BIR Ruling No. DA-262-2001 dated December 18, 2001) HCacTI 3. The Partition Agreement whereby the Owners and FLI have allocated unto each other their share in the saleable lots in consideration of their respective contributions, are not subject to the DST imposed under Section 196 of the NIRC, as amended, considering that the allocation is made without monetary consideration and is not in connection with a sale. In this regard, Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26)provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable". Accordingly, since the aforementioned Partition Agreement was executed without consideration and was not in connection with a sale between the Owners and FLI, no DST is due and collectible on said Agreement. However, we understand that the notarial acknowledgments to said Partition Agreement shall be subject to the DST pursuant to Section 188 of the NIRC, as amended, in the amount of P15.00. 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) with regard to the (a) transfer of the titles to be received by the above-named Landowners and Developer based on their respective allocations pursuant to their agreement, without need of presentation of proof of payment of the creditable withholding tax, VAT and the corresponding DST. 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 net saleable area in accordance with the allocation ration in the Partition Agreement. For this purpose, a compliance report of the project indicating the number of residential lots, the respective TCTs and the party in whose name the corresponding title was issued. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service