Grand Monaco Estate Developers, Inc.

December 4, 2009 BIR RULING [DA-(JV-035) 737-09] Section 22 (B); DA-371-2008 dtd 6/15/2008 Grand Monaco Estate Developers, Inc. # 6 Pittsburgh St. near Aurora Boulevard Cubao, Quezon City Attention: Reynaldo A. Carpio Ph.D President Gentlemen : This refers to your letter dated July 28, 2009, requesting exemption from the payment of capital gains tax and documentary stamp tax in connection with the Joint Venture Agreement, you entered into with the landowners, for the development of their land into a subdivision project, pursuant to Section 22 (B) of the Tax Code of 1997. Documents submitted disclosed that GRAND MONACO ESTATE DEVELOPERS, INC. (Grand Monaco, for short), entered into a joint-venture agreement (jva) with the landowners represented by their attys-in-fact Liza F. Mendoza-Dee and Divina F. Mendoza-Herrera for the development of their land covered by Transfer Certificate of Titles (TCT) Nos. N-82737 to N-82745 and N-503677 consisting of an aggregate land area of 7,151 square meters, all located at Ilang-Ilang Street, Mayamot, Antipolo City; that Grand Monaco is a company engaged in real estate development and represents that it has the facilities, funds, personnel, and expertise required for the development of a residential subdivision project; that the parties agree to enter into a joint venture for the development of the subject property into a multi-units residential community, subject to the terms and conditions of the jva; that the parties agreed, among other things, that they will share in the gross saleable area by assigning to them designated individual residential lots and units; that sixty-seven and one-half percent (67.5%) of the gross saleable units shall be assigned to Grand Monaco, the developer, while the remaining thirty-two and one-half percent (32.5%) shall be assigned to the landowners. In reply, please be informed as follows: DACIHc Pursuant to Section 22 (B) of the NIRC, as amended, the term "corporation" includes partnership, 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. P.D. No. 929 amended the definition of the taxable corporation 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 Section 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, the joint venture of Grand Monaco (the Developer) and the landowners as represented by their Attys-in-fact Liza F. Mendoza-Dee and Divina F. Mendoza-Herrera , is not a corporation subject to corporate income tax. However, for VAT purpose, the joint venture (or consortium) is by itself a taxable entity. Moreover, the contribution of each of the parties to the joint venture is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax since the parties did not convey or transfer any ownership or interest when they contributed to the joint venture but merely pooled their resources to a common fund. The said contributions constitute their capital contribution to the joint venture project. The transfer is also not subject to value-added tax (VAT), since the transfers are not in the course of business but capital contributions. In view of the above, there will be no taxes involved in the event that the landowners transfer and assign to Grand Monaco sixty seven and one half percent (67.5%) of the resultant subdivided lots in return for the latter's cost of development. CDTSEI The allocation of saleable lots of the Project between the landowners and Grand Monaco, in consideration of their respective contributions 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 party has contributed. The Memorandum of Sharing whereby Grand Monaco and the landowners will allocate unto each other their share in the saleable area in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the NIRC, 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 contributed. However, the acknowledgment to said Memorandum of Sharing is subject to the documentary stamp tax pursuant to Section 188 of the NIRC, as amended. Thus, inasmuch as there is no monetary consideration but a mere return of capital, the eventual execution and registration of the Memorandum of Sharing of subdivided lot is not subject to capital gains and documentary stamp taxes. However, upon the 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 regular income tax rate under Section 27 (A) of the NIRC, as amended and to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR 6-2001. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the NIRC, as amended based on the gross selling price or fair market value of the properties whichever is higher. Likewise, the said sale shall be subject to VAT. Finally, the joint venture or the party who undertakes the development of the project shall file an Annual Information Return and other returns required to be filed with the RDO where it is registered or required to be registered. This will authorized 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 deed of 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 Transfer Certificate/s of Title 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 the parties to the joint venture shall inform the Bureau of Internal Revenue, through the Law Division, of the fulfilment of the requirement on the distribution of the developed/saleable lots/units in accordance with the allocation ratio in the Joint Venture Agreement. For this purpose, a compliance report of the project indicating the number of lots/units developed/built, respective TCTs/CCTs and the party in whose name the corresponding title was issued. (BIR Ruling No. 373-2008 dated June 19, 2008) cAaDHT 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.) GREGORIO V. CABANTAC Deputy Commissioner