November 10, 2009 BIR RULING [DA-(JV-030) 662-09] 27 (A); 22 (B); 254-91; 317-92; 341-93 Francisco G. Tagao Law Office Lot 23 Block 56, Francisco Reyes St. GAHA, BF Homes Parafiaque Subdivision Parafiaque City Attention: Atty. Francisco G. Tagao Gentlemen : This refers to your letter dated March 9, 2009, requesting on behalf of your clients, Ayala Land, Inc. (ALI) and Manila Jockey Club, Inc. (MICI), for confirmation on the tax consequences of the Joint Venture Agreement (IVA) executed by them. It is represented that ALI and MJCI entered previously into a Joint Development Agreement (IDA) which was subsequently amended and supplemented for the construction and development of a building complex on a project site located at Sta. Cruz, Manila covered by Transfer Certificates of Title (TCT) Nos. 270084 and 51126 issued in the name of MICI covering an area of 10,849 sq.m. and 762.30 sq.m. respectively. Both parties contributed for the construction and development of the Building Complex over the project site, with title over the two (2) parcels of land on which the project site is located remaining with MICI. MICI agreed to contribute fully for the construction and development of the Retail Development and received as part of its allocation all developed units in the Retail Development. In return for their respective contributions for the construction and development of the office buildings, the parties agreed to receive as their respective allocations, Developed Office Units with an aggregate gross leaseable area of 40,513 sq.m. computed in accordance with the formula provided in their IDA. With the completion of the construction and development of the Building Complex, the parties have entered into a Deed of Partition for the allocation of the Developed Units unto them. Under the Deed of Partition, the allocation of the cenym@t 2007 C0 Tecmo Ala nn and Acorn ‘PtopineTealon Enjoy Fe lene 2018Developed Units for the Project was made between them as follows: L The Retail Units and the Developed Units specified and described in Annex B of the JDA shall be allocated to MJCI and registered in its name as a return of MJCT's contribution. Ps The Developed Units specified and described in Annex C of the JDA shall be registered in the name of ALI and allocated to ALI as a return of ALI's contribution, 3. All other areas of the Building Complex which are not specified as allocated to any Party under the Deed of Partition shall be co-owned by the parties in accordance with the prorated interest in the Building Complex pursuant to the terms of the Agreement, The respective allocations of the parties will be annotated in the TCTs issued in the name of MJCI. MICI and ALI will enter into a lease agreement for the lease of the Project Site and the air space of the Project Site to the extent of the area occupied by the Developed Units of ALI from the project. On December 12, 2008, the parties executed a JVA for the purpose of Jeasing the developed office units. They will contribute and pool together under one operation and management their respective Developed Office Units and their interests thereto and initial operating cash requirement of the JV in accordance with their respective interest in the JV of 70% for ALI and 30% for MJCI. Any additional funding requirement shall be contributed by the parties in accordance with their respective interests in the JV. The parties shall exercise general direction and control of the JV through the Tenant Review Committee composed of six (6) members, four (4) of which shall be appointed by ALI and the other two (2) shall be appointed by MICI. ‘The JV will not be registered as a domestic corporation. However, as an unincorporated taxable entity it will nonetheless be registered for tax purposes. The JV shall be conducted under the business name "San Lazaro BPO Complex Joint Venture". On March 5, 2009, the parties entered into an Amendment Agreement to the JVA which changed the office address of the JV which is the office address of ALI at 31/P, Tower One Exchange Plaza, Ayala Triangle, Ayala ‘Avenue, Makati City to Vertex One, Felix Huertas comer Yuseco Sts. Sta. Cruz, Manila. The JV shall keep at all times during the term of the IVA separate books of accounts correctly and adequately reflecting the business transactions of their venture. Its books of accounts and receipts will be registered with the BIR. It will Copy 20%7 CD Tawa fl, ren Recess. ‘Pippo Teaion Eneycope Fil lene 218,register with the BIR as withholding agent and for VAT purposes. It will also file quarterly and annual income tax and VAT returns. Alll the funds of the joint venture shall be deposited in a common fund in the name of and for the account of the JV at such bank or banks as the parties shall designate as their depository or depositories. ‘The rental income derived from the lease of the Developed Office Units shall first be applied to the payment of the expenses incurred by the JV in the operation of the Developed Units. The net rental income of the JV shall be distributed as dividends to the parties in accordance with the terms of the JVA. The JVA shall be effective upon the execution thereof and shall be in full force and effect until the 25th anniversary of the Commencement Date. On the bases of the above, you would like to request for a confirmation of the following: 1. The unincorporated JV formed by ALI and MICI conducted under the business name "San Lazaro BPO Complex Joint Venture" for the purpose of leasing the Developed Office Units allocated to and owned by them under the Deed of Partition will be treated as a corporation for tax purposes, separate and distinct from ALI, MJCI and the JV partners. 2. The results to be paid by the lessees of the Developed Office Units to "San Lazaro BPO Complex Joint Venture" during the term of the IVA for the leasing of the same which are separately owned by ALI and MJCI are to be treated as income of the JV. 3. The JV under the business name "San Lazaro BPO Complex Joint Venture" shall be allowed to claim a deduction from its gross income consisting of rental income derived from the lessees of the Developed Units under Sec. 34 of the 1997 Tax Code. 4. The distribution of the net rental income to the joint venture partners in accordance with the JVA is treated as dividends and therefore, not subject to tax pursuant to Sec. 27 (D) (4) of the Tax Code of 1997. In reply, please be informed that we confirm as follows: 1. Pursuant to Sec. 27 (A) of the Tax Code of 1997, as amended by Republic Act (RA) No. 9337, an income tax of thirty five percent (35%) is imposed upon the taxable income derived during the taxable year from all sources within and without the Philippines by every corporation, as defined in Sec, 22 (B) eprint 2017 00 Tecneeis Aine and Aces, ne PilopveYoaton reycbpea Fat Rtas 2010of the same Code, and taxable as such. The unincorporated joint venture formed by ALI and MICI conducted under the business name "San Lazaro BPO Complex Joint Venture" for the purpose of leasing the Developed Office Units allocated to and owned by them under the Deed of Partition will be treated as a corporation for purposes of taxation. In the case of Evangelista, et al. vs. The Collector of Internal Revenue, G.R. No. L-9996, October 15, 1957, the Supreme Court held as follows: "the term corporation includes partnerships, no matter how created or organized. This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposcs of the tax on corporations." in the same case, a US tax commentator, stated that: "The term ‘partnership’ includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture, is carried on, . . . (8 Merten's Law of Federal Income Taxation, p. 562 Note 63)" In BIR Ruling Nos. 254-91 dated November 26, 1991 and 187-82 dated June 3, 1982, this Office opines that to constitute a joint venture certain factors are essential to wit: (a) Each party to the joint venture must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, material or money; (6) Profits must be shared among the parties; (©) There must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise; and (@) Usually, there is single business transaction rather than a general or continuous transaction. Such being the case, the unincorporated JV of MJCI and ALI known as “San Lazaro BPO Complex Joint Venture" is deemed a corporation subject to the 30% regular income tax under Sec. 27 (A) of the Tax Code of 1997, as amended by RA No. 9337, separate and distinct from ALI, MICI and the JV partners. 2, The rental payments to be paid by the lessees of "San Lazaro BPO Complex Joint Venture" which are separately owned by ALI and MIC] are to be Cony 2017 00 Teenage Alera nd Aco re ‘Pipe Teton Gaopede Ft Release 2048treated as income of the JV. In BIR Ruling No. 317-92 dated October 28, 1992, 2 corporations entered into a Memorandum of Agreement for the construction of an office building. They contributed in the construction thereof, and upon completion they were allocated specifically designated floors and the right to use the parking stalls in proportion to their agreement. Subsequently, the parties entered into a separate JVA whereby they agreed to pool the specific floors allotted to them for the purpose at leasing them under a standard rental rate and to use a common agent to handle contract negotiations, tenant relations, maintenance, accounting of income and expenses. The parties further agreed to contribute money to a common fund for the initial and, if necessary, additional working capital of the joint venture. One of the parties will be appointed as manager of the JV and subject to the mutual control of the parties, shall be responsible, among others, for the leasing of the building floors or portions thereof. Irrespective of who owns the floor or floors, or portions thereof that are leased out, the JV will hold the rental receipts in a common pool and the net balance every quarter, after deducting all expenses chargeable thereto, such as salaries of the JV personnel and maintenance expenses shall be distributed to them as dividends in accordance with their agreement. This Office had the occasion to rule that the afore-stated arrangement to be entered subsequently by the parties for the leasing of the building floors or portions thereof separately owned by them will create a JV subject to tax under Section 24 (a) [now Section 27 (A)] of the Tax Code, as amended. It further held that the rentals to be received by the JV from the tenants in the building are income to the said JV, In view of the fact that ALI and MJCI have formed a taxable corporation under their JVA and that: a. The parties have contributed their allocated developed units and cash to cover initial operating expenses and any additional funding to a common fund for the purpose of leasing such office units to third parties. b. The JV will be registered with the BIR as a taxable entity for tax purposes and it shall conduct business under the business name "San Lazaro BPO Complex Joint Venture" with office address at Vertex One, Felix Huertas St. comer Yuseco St., Sta. Cruz, Manila, Will register with the BIR as a withholding agent and vatable entity and will file quarterly and annual income tax and VAT returns. c. It shall keep at all times during the term of their undertaking separate books of accounts and records correctly and adequately reflecting the ‘epg 2077 OD Tecaogs Ai, he Pees, Phipps Teton Eeytope Fit Rlene 2038 5business transactions of the joint venture. 4. Alll the funds of the JV shall be deposited in a common fund in the name of and for the account of the JV at such bank or banks as the parties shall designate as their depository or depositories. e The parties have formed a Tenant Review Committee that shall exercise general direction and control of the JV. f. The net rental income shall be divided between the parties in proportion to their respective interest after deduction of expenses. the rentals to be paid by the lessees of the Developed Office Units to the "San Lazaro BPO Complex Joint Venture" during the term of the JVA are treated as income of the joint venture subject to regular income tax of 30% or to the 2% minimum corporate income tax (MCIT), whichever is higher. If it so happens then it is subject to the MCIT beginning in the fourth taxable year immediately following the year in which such taxable joint venture commenced its business operations. 3. The JV under the business name "San Lazaro BPO Complex Joint Venture" shall be allowed to claim a deduction from its gross income consisting of rental income derived from the lessees of the Developed Units under Sec. 34 of the 1997 Tax Code. In BIR Ruling No. 341-93 dated July 30, 1993, we held as follows: “In computing taxable income subject to tax under Sections 24(2), (b) and (¢) and 25(a)(1) of the Tax Code as amended, there shall be allowed as deductions the items specified in paragraphs (a) to (1) of Section 29 (now Sec. 34 of the 1997 Tax Code) of the same Code, Such being the case, the items of deductions specified in paragraphs (a) to (i) of Section 29 of the Tax Code, as amended, can be deducted in computing the net taxable income of the joint venture of ALI and API, insofar as such deductible items were incurred or sustained in connection with the IV's trade or business of leasing the floors or portions separately owned by them in the Ayala Office Tower Building. Accordingly, the "San Lazaro BPO Complex Joint Venture” shall be allowed to claim as deductions from its gross income consisting of rental income derived from the lessees of the Developed Office Units any, some or all of the items of deductions enumerated under Section 34 of the same Tax Code, 4, The distribution of the net rental income of the JV to the co-venturers in accordance with the JVA are not likewise subject to income tax since said Cony 2017 CD Toes Ala re. and Acosta Pipe Teron tneycopec Fel Ross 218,profits are in the nature of dividends which are not subject to tax. (BIR Ruling Nos. 317-92 dated October 28, 1992 and 254-91 dated November 26, 1991) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Bureau of Internal Revenue Copan 2017 CD Texts Al, en ozs, Pipe Tesaon Epona Ft Ross 2018