BIR Ruling [UN-025-95]

January 11, 1995 BIR RULING [UN-025-95] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati, Metro Manila Attention: Atty . C . C . Gison Tax Division Gentlemen : This refers to your letter dated December 12, 1994 stating that KSA Realty Corporation (KSA) owns three (3) parcels of land in Makati, Metro Manila, with an aggregate area of 6,122 square meters, more or less, evidenced by TCT Nos. 17546, 175469 and 175470 of the Register of Deeds of Makati, Metro Manila; that KSA will enter into an Investment Agreement ("Agreement") with certain Investor/s for the construction of two (2) office buildings, consisting of a tower of 46 stories, an annex of 6 stories and a basement of 6 levels ("Project"), on the said lots owned by KSA; that for this purpose, KSA and the Investor/s will agree that: cdtech a) KSA will contribute the lots on which the Project will stand, while the Investor/s will contribute cash in such amounts as may be required to defray the construction costs of the Project, in consideration for which KSA and the Investor/s will acquire and be allocated a specific number of floors and parking stalls in the Project; b) For the duration of the construction period, KSA will be appointed and will act as Project Manager to handle and be responsible for managing, directing and supervising the planning, design, development and construction of the Project, while the Investor/s participation during the construction period will be merely passive and will be limited solely to investing in the Project; and c) KSA and the Investor/s will form a condominium corporation, to hold title to, manage and maintain the lands on which the Project stands, as well as the common areas of the Project, pursuant to the provisions of R.A. 4726, otherwise known as The Condominium Act. For this purpose, KSA and the Investor/s will execute a Deed of Conveyance in favor of the condominium corporation, to transfer the lands and the common areas to the condominium corporation without any monetary consideration. that in the Investment Agreement to be entered into by KSA and the investor/s, there will be no sharing of profits between and among them because once the construction of the Project is completed, the allocation of the designated floors and parking slots between and among the parties will represent a mere return of capital respectively invested by them; and that in addition, once the designated floors and parking slots are allocated among the parties, the cooperative relationship between and among them will cease, except only to the extent that they become fellow-members of the condominium corporation to be formed pursuant to the provisions of the Condominium Act. You now request on behalf of your client, KSA, for a ruling to confirm your opinions that: 1. The Investment Agreement which KSA plans to enter into with certain Investor/s for the construction and development of the Project, and the allocation of a specific number of floors and parking slots in the Project among the parties, will not create a separate taxable joint venture within the meaning of Section 20(b), in relation to Section 24(a) of the Tax Code, as amended; 2. Should KSA or any of the Investor/s subsequently sell any of the floors, or portions of the floors, allocated to them to such third parties, the gain that may be realized by KSA and/or the Investor/s will be subject to the regular 35% corporate income tax under Section 24 of the Tax Code, and to the creditable/expanded withholding tax under Revenue Regulations No. 6-85, as amended. The sale will likewise be subject to the documentary stamp tax imposed under Section 196 of the Tax Code; and 3. The Deed of Conveyance to be executed by KSA and the Investor/s conveying, without monetary consideration, the land and common areas of the Project in favor of the condominium corporation formed pursuant to the Condominium Act will not be subject to income tax, expanded withholding tax and documentary stamp tax. In reply, please be informed that pursuant to Section 20(b) of the Tax Code, the term corporation includes 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. In view thereof, it is our opinion that the joint venture of KSA and its Investor/s is not subject to the corporate income tax under Section 24 of the Tax Code. However, the co-ventures 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 opinions that the Investment Agreement to be executed by KSA and its investor/s for the construction of the Project and the allocation of specifically designated number of floors and parking slots among the parties will not create a separate taxable joint venture within the meaning of Section 20(b), in relation to Section 24(a), of the Tax Code, and that should KSA and/or its Investor/s sell any of the floors or portions of the floors allocated to them to such third parties, the gain that may be realized by KSA and/or the Investor/s from such sale will be subject to the regular 35% corporate income tax under Section 24 of the Tax Code, and to the creditable/expanded withholding tax under Revenue Regulations 6-85, as amended, is hereby confirmed. (BIR Ruling No. 274-92 dated September 30, 1992). Moreover, 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 Deed of Conveyance is without consideration and is not in connection with a sale made to the condominium corporation, no income was generated and a fortiori, no creditable expanded withholding tax (EWT) and documentary stamp tax (DST) are payable and collectible. However, the acknowledgment to said deed of conveyance is subject to documentary stamp tax (DST) of P10.00 pursuant to Section 188 of the Tax Code, as amended. In view thereof, your opinion that the Deed of Conveyance to be executed by KSA and the Investor/s conveying, without monetary consideration, the land and the common areas of the Project in favor of the condominium corporation formed pursuant to the Condominium Act will not be subject to income tax, expanded withholding tax and documentary stamp tax under Section 196 of the Tax Code, is also hereby confirmed. (BIR Rulings No. 349-93 dated July 30, 1993; BIR Rulings No. UN-328-94 dated November 22, 1994). Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)