BIR Ruling [UN-203-95]

June 6, 1995 BIR RULING [UN-203-95] Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . C . C . Gison Gentlemen : This refers to your letter dated May 9, 1995 stating that your client, Metropolitan Bank and Trust Company ("MBTC"), is the registered owner of a parcel of land located at Masangkay Street, Binondo, Manila and particularly described in Transfer Certificate of Title No. 225663 issued by the Register of Deeds of Manila; that MBTC and Central Realty Development Corporation ("CRDC") will enter into a Memorandum of Agreement ("MOA") for the development and construction of a multi-storey residential/commercial building ("Project") on the lot owned by MBTC; that the MOA provides for the following provisions: a. MBTC will contribute the land on which the proposed Project will be constructed and cash, while CRDC will contribute cash in such amount as may be required to defray the construction cost of the Project, in consideration for which CRDC will acquire ownership of specifically designated whole floors or portions of floors for its future head offices and parking slots in the Project; b. CRDC will be the Project Coordinator of the Project. As such, CRDC is responsible with such functions as are usually and normally attached to such position and such other functions or duties as may be agreed upon with MBTC; and c. Upon completion of the construction, MBTC and CRDC 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 MBTC and CRDC in favor of the condominium corporation without any monetary consideration. You now request for a ruling to confirm your opinions that: 1. The MOA to be executed by MBTC and CRDC for the construction of the project and the allocation of specifically designated whole floors or portions of floors and parking slots in the Project among the parties will not give rise to a separate taxable joint venture within the meaning of Section 20(b), in relation to Section 24(a) of the Tax Code. 2. In the event that MBTC or CRDC 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 be realized by MBTC and CRDC from such sale will be subject to the regular 35% corporate income tax under Sections 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 of Conveyance to be executed by MBTC and CRDC conveying the land and 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 participation), 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 MBTC and CRDC is not subject to the corporate income tax under Section 24 of the Tax Code. 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 opinions that: (a) the MOA to be executed by MBTC and CRDC for the construction of the Project and the allocation of specifically designated whole floors or portions of floors and parking slots in the Project among the parties will not give rise to a separate taxable joint venture within the meaning of Section 20(b), in relation to Section 24(a), of the Tax Code, as amended; (b) in the event that MBTC and/or CRDC 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 be realized by MBTC and/or CRDC from such sale will be subject to the regular 35% corporate income tax under Section 24 of the Tax Code, as amended, and to the creditable expanded withholding tax (EWT) under Revenue Regulations 6-85, as amended; and (c) the sale will be subject to the documentary stamp tax (DST) imposed under Section 196 of the Tax Code, as amended, are hereby confirmed. (BIR Rulings No. 274-92 dated September 30, 1992; BIR Rulings No. UN 019-95 dated January 9, 1995). Moreover, Section 185 of the Revised DST Regulations (Regulations No. 26) provides that "conveyance 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 MBTC and CRDC conveying the land and common areas without monetary consideration, to the condominium corporation pursuant to the provisions of the Condominium Act will not result in any 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 019-95 dated January 9, 1995). cdtech Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)