Co-Venturers Separately Subject to Regular Corporate Income Tax on Their Taxable Income

February 11, 1999 BIR RULING NO. 018-99 Sec. 22 (B)-488-98-018-99 Megaworld Properties and Holdings, Inc. 28/F The World Centre 330 Sen. Gil Puyat Avenue Makati City Attention: Atty . Garry V . de Guzman Corporate Lawyer Gentlemen : This refers to your letter dated November 27, 1997 stating that Megaworld Properties and Holdings, Inc. (MEGAWORLD) and LA O' David Agro Development Corporation and Realty Office (LA O') executed a Joint Venture Agreement (JVA) on July 6, 1995 to develop a residential condominium project to be referred to as "The Manhattan Square" situated at Valero St., Salcedo Village, Makati City; that pursuant to the JVA, MEGAWORLD and LA O' agreed, among others, as follows: a) LA O' shall contribute a land with an area of 925 sq. m. (Property) covered by Transfer Certificate of Title No. 120290 of the Registry of Deeds of Makati City and MEGAWORLD shall be responsible for the financing, planning, designing, execution, construction, monitoring and supervision of all facets of work on the building in accordance with the architectural firm to be designated by MEGAWORLD; LexLib b) LA O' shall be entitled to Twenty Eight Percent (28%) of the net saleable area of the completed condominium building. LA O' shall also be entitled to Twenty Eight Percent (28%) of the total parking slots in the project. The remaining areas of the project shall belong and be registered under the name of MEGAWORLD. It was also agreed upon by the parties that MEGAWORLD shall be the exclusive marketing agent of all units in the project; c) The title to the Property shall remain with LA O' until conveyance of the Property by LA O' in favor of the Condominium Corporation and it was stipulated further that the condominium certificates of title to the units in the Project shall be issued under the name of the parties directly according to their participating interest mentioned above. You now request for a ruling to confirm your opinions that: 1. The joint venture between MEGAWORLD and LA O' for the construction of the said condominium project will not create a taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997. 2. The allocation of the units and the issuance of the corresponding Condominium Certificates of Title by the Registry of Deeds of Makati City to MEGAWORLD and LA O', representing their respective shares or participating interests in the project as stipulated in the JVA are not taxable events, therefore, not subject to income and/or expanded withholding tax, because it is only upon sale or disposition of the units allocated to the MEGAWORLD and LA O' to third parties that the gain realized by the parties in the said transaction will be subject to the regular 35% income tax under Section 27(A) of the Tax Code of 1997 and to the expanded withholding tax under Revenue Regulations No. 6-85, as amended. LLjur In reply, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, the term "corporation" shall include partnerships, 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. Such being the case, it is our opinion that the joint venture of MEGAWORLD and LA O' for the construction of "The Manhattan Square" is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. Considering the foregoing, your opinion that the joint venture between MEGAWORLD and LA O' for the construction and development of the Project will not create a taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997. Furthermore, the allocation of the units and the issuance of the corresponding Condominium Certificates of Title by the Registry of deeds of Makati City to MEGAWORLD and LA O', representing their respective shares or participating interests in the project as stipulated in the JVA, are not taxable events, therefore, not subject to income and/or expanded withholding tax, because it is only upon the sale or disposition of the units allocated to MEGAWORLD and LA O' to third parties that the gain realized by the parties in the said transaction will be subject to the regular 34% income tax for the taxable year 1997 under Section 27(A) of the Tax Code of 1997 and to the expanded withholding tax under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 2-98. (BIR Ruling No. DA-488-98) dctai 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 will be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group