Profits of the Joint Venture are Not Subject to Income Tax

November 26, 1991 BIR RULING NO. 254-91 24 000-00 254-91 Gentlemen : This refers to your letter dated December 12, 1990 stating that your client, Empire Stateland and Resources, Inc. (Empire) a domestic corporation entered into a business tie-up with Uniphil Marketing, Inc. (Uniphil) another domestic corporation, whereby both firms agreed to pool their resources together for the purpose of developing and constructing condominium units and selling them to the public; that to accomplish their objectives, Uniphil will contribute a parcel of land as well as labor and materials while Empire will supply labor and materials; that the development and construction of housing units and the eventual sale thereof will be undertaken and managed by Uniphil Empire Venture (Venture), an entity that will be put up by the contracting parties solely for said purpose; that the parties have agreed that Uniphil will receive 70% of the profits that Venture will realize, while Empire will share 30% thereof; and that you are of the opinion that the respective shares of Uniphil and Empire in the net profits of Venture is not subject to income tax, the same having been taxed in the hands of Venture otherwise the same income would be subjected to 35% tax each in the hands of Venture, Uniphil and Empire or a total tax of 70%. cdtech In connection therewith, you now request a ruling on the following: "1. What is the tax status of Venture? Is it considered a joint venture and therefore taxable as a domestic corporation? "2. What is the tax treatment of the distributive shares of Uniphil and Empire in the respective amount of 70% and 30% accruing from the net profits of venture? In reply thereto, I have the honor to inform you that to constitute a "joint venture" certain factors are essential: "(a) each party to the venture must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, material or money; "(b) profits must be shared amount the parties; "(c) there must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise; "(d) usually, there is single business transaction rather than a general or continuous transaction." (Words and Phrases, Vol. 23, p. 230) Likewise, a joint venture was created when two corporations while registered and operating separately were place under one sole management which operated the business affairs of said companies as though they constituted a single entity thereby obtaining substantial economy and profits in the operation (Collector vs. Batangas Transportation et al. 102 Phil 822; See also B.I.R. Ruling Nos. 020 (b) -020-80-187-82 dated June 3, 1982; 24-00-00-115-86 dated July 17, 1986; 069-90 dated May 9, 1990) Thus, Uniphil Empire Venture which has been constituted as a single entity whereby Empire and Uniphil agreed to pool their resources for the development of a parcel of land and the construction condominium units thereon as well as the eventual sale of said units is a joint venture which is subject to the 35% tax under Section 24 (a) of the Tax Code, as amended. However, the respective 70% and 30% shares of Uniphil and Empire from the profits of the joint venture are not subject to income tax since said profits are in the nature of dividends which are not subject to tax under Section 24 (e) (4) of the Tax Code, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation the same could not be substantiated then this ruling shall be considered null and void. Very truly yours, (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner (Officer-in-Charge)