Assignment of Certain Shares Exempt from Capital Gains Tax

October 6, 1999 BIR RULING NO. 153-99 22 (B) & 110 (A) (1) (b) (2)-000-00-153-99 Ramon F. Garcia & Company Suite 410 Manila Bank Building Ayala Avenue, Makati City Attention: Mr . Ramon F . Garcia Gentlemen : This refers to your letter dated September 21, 1998 stating that your client, Frabelle Fishing Corporation (FFC), together with the Armed Forces of the Philippines Retirement & Separation Benefits System (AFP-RSBS), First Alliance Property Ventures, Inc. (FAPVI) and Sta. Lucia Realty and Development, Inc. (SLRDI), purchased from Doa Cristina Investment and Development Corporation (DCIDC) parcel of land with a total area of 422,437 square meters under TCT Nos. T-34623 and T-34624 for Two Hundred Fifty-Three Million Four Hundred Sixty-Two Thousand Two Hundred Pesos (P253,462,200.00); that this is evidenced by an Agreement to Sell duly notarized on December 18, 1996; that out of this total, FFC paid Ninety Million Pesos (P90,000,000.00) which represents a 15 hectare share; that FFC prior to this Agreement had entered into an agreement with Herbert Tiu Laurel (HTL) for the latter to contribute Eighteen Million Pesos (P18,000,000.00) representing 20% of the P90,000,000.00 FFC contribution to the said property; that the parties involved had agreed that FFC and HTL share be treated as one entity under FFC; that in this regard FFC formally executed on the 20th of December 1996 (notarized in December 26, 1996) Declaration of Trust in favor of HTL corresponding to the latter's 20% share; that on December 19, 1996, the three (3) buyers, AFP-RSBS, FFC and FAPVI entered into a Joint Venture Agreement with SLRDI for the development of the said property into a first class residential subdivision; that once completed, FFC shall received 17.86% of the subdivision's net saleable area; that the Agreement also states that upon the approval of the subdivision plan, the parties shall agree on their lot assignments, that the subdivision plan was already approved and the parties have already agreed on their corresponding assignments; that FFC wanted that the corresponding 20% of HTL be titled directly to him in accordance with the agreement dated December 20, 1996; and that the Joint Venture Partners' share on the developed subdivision includes the cost of development (gross area is reduced by 50%). Based on the foregoing, you are now requesting for a ruling on the following queries: 1. Is the assignment of HTL's 20% (transfer of title of the land) of FFC share directly to him in accordance with their agreement, exempt from capital gains tax or creditable withholding tax? 2. Is the 17.86% share (less 3.57% share of HTL) of FFC exempt from capital gains tax or creditable withholding tax? 3. Can Sta. Lucia Realty and Development, Inc. assign portion of input taxes it has accumulated in connection with the development of the Project to its Joint Venture Partners considering that landowners' includes the cost of development (gross area is reduced by 50%)? In reply, please be informed as follows: 1. The assignment of FFC share representing HTL's 20% share transferring title of the land directly to HTL is exempt from the capital gains tax imposed under Section 24(D)(1) and Section 27(D)(5) both of the Tax Code of 1997 and to the creditable withholding tax prescribed under Revenue Regulations No. 2-98 implementing, among others, Section 57(B) of the same Code considering that the assignment in this case, is merely an act of partitioning the commonly owned property. It is nothing more than an act of terminating the co-ownership by making each co-owner, owner of specific identifiable developed lot or unit. At this stage, no taxable income has yet been realized by the co-owners since the process constitutes a single act of retaining their contributed capital; that act of assigning portions of the developed lots to each co-owners should not be treated as a taxable event. Hence, not subject to the capital gains tax and creditable withholding tax. (BIR Ruling No. DA-065-97 dated February 10, 1997) 2. For the same reason stated in answer No. 1. the 17.86% share (less 3.75% share of HTL) of FFC is likewise not subject to capital gains tax imposed under Section 24(D)(I) and Section 27(D)(5) both of the Tax Code of 1997 and to the creditable withholding tax prescribed under Revenue Regulations No. 2-98 implementing, among others. Section 57(B) of the same Code. (BIR Ruling No. DA-065-97 dated February 10, 1997). 3. Your third query is answered in the affirmative. Sta. Lucia Realty and Development. Inc. could assign portion of the input tax it has accumulated in connection with the development of the Project to its Joint Venture Partners in proportion to their contribution to the Joint Venture Project since the landowners share in the developed subdivision includes the cost of development (gross area is reduced by 50%). Hence, could be apportioned among the Joint Venture Partners considering that each co-venturer was charged with the cost of development on their respective share of the developed subdivision lots which necessarily includes any input VAT that was accumulated in connection with the development of the Project. 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue