BIR Ruling [UN-125-95]

March 30, 1995 BIR RULING [UN-125-95] Sycip Gorres Velayo & Co. 6760 Ayala Avenue, Makati, Metro Manila Attention: Atty . C . C . Gison Head, Tax Division Gentlemen : This refers to your letter dated February 28, 1995 stating that your client, San Miguel Properties Philippines. Inc. (SMPPI), is the registered owner of a parcel of land located at St. Francis Avenue and Lourdes Street, City of Mandaluyong, Metro Manila; that SMPPI and its Investor/s will enter into an Investment Agreement ("Agreement") for the development and construction of a commercial highrise building ("Project") on the lot owned by SMPPI; that the Agreement provides for the following provisions: a. SMPPI will contribute the land on which the proposed Project will be constructed while on the Investor/s part, it/they will contribute cash in such amounts as may be required to defray the construction cost of the Project, in consideration for which the Investor/s will acquire ownership of a specific number of a whole or portion of floor and parking rights in the Project, in proportion to its/their contribution to the Project; b. SMPPI will be the developer of the Project. As such, SMPPI shall be exclusively responsible for managing, directing and supervising the planning, 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. c. Upon completion of the construction, SMPPI and the Investor/s will form a condominium corporation for the purpose of holding title to, manage, maintain the land and the common areas of the Project pursuant to the provisions of the Condominium Act. For this purpose, a Deed of Conveyance will be executed between SMPPI and the Investor/s in favor of the condominium corporation, to transfer the land and the common areas to the condominium corporation without any monetary consideration. You now request for confirmation on the following: 1. The Agreement to be executed by SMPPI and the Investor/s for the construction of the Project and the allocation of specific number of whole or portion of floor and parking rights in the Project among the parties will not give rise to separate taxable joint venture within the meaning of Section 20(b), in relation to Section 24(a) of the Tax Code, as amended. 2. In the event that SMPPI or its Investor/s subsequently sell any floors or portions of the floors designated to them to such third parties as they may see fit or appropriate, the gain that may realized by SMPPI and its 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 No. 6-85, as amended. The sale will also be subject to the documentary stamp tax imposed under Section 196 of the Tax Code; and 3. The Deed Conveyance to be executed by SMPPI and the Investor/s conveying the land and the common areas without any monetary consideration to the condominium corporation formed pursuant to the provisions of The Condominium Act will not result in any income tax, expanded withholding tax and documentary stamp tax under Section 196 of the Tax Code. In reply, please be informed that pursuant to Section 20(b) of the Tax Code, as amended, 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 SMPPI 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 SMPPI and its Investor/s for the construction of the Project and the allocation of specifically designated number of floors and parking rights 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, and that should SMPPI 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 SMPPI and/or 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 (EWT) under Revenue Regulations 6-85, as amended, is hereby confirmed. (BIR Rulings No. 274-92 dated September 30, 1992; BIR Rulings No. UN-328-94 dated November 22, 1994). Moreover, Section 185 of the Revised Documentary Stamp Tax (DST) 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 EWT and DST are payable and collectible. However, the acknowledgment to said Deed of Conveyance is subject to 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 SMPPI 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, EWT and DST under Section 196 of the Tax Code, as amended, 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) By: ALICIA L. TOMACRUZ Head Rev. Executive Asst. (Legal)