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May 28, 2010

BIR RULING [DA-(JV-017) 077-10]

Secs. 22 (B); 27 (A); 196; RR 2-98;


BIR Ruling Nos. 153-99; 075-97;
DA-373-08; DA-356-08; DA-319-08;
DA-196-08; DA-455-07

SGV & Co.


6760 Ayala Avenue
Makati City

Attention: Atty. M. F. A. Balili


Partner

Gentlemen :

This refers to your letter dated April 2, 2009 requesting on behalf of your
client, Federal Land Inc. ("FLI"), for a confirmation on the tax consequences of its
joint venture agreement with Metropolitan Bank & Trust Company ("MBTC") for the
development of two (2) condominium projects known as the "The Oriental Place" and
The Capital Towers (collectively known as the "Projects").

The facts as represented are as follows:

FLI is a real estate developer for residential, commercial and mixed-use


property developments in Metro Manila. MBTC, on the other hand, is the absolute
and registered owner of four (4) parcels of land located at Chino Roces Avenue and
Javier Street, Brgy. Kayamanan "A", Makati City, with an aggregate area of One
Thousand Six Hundred Sixty Seven (1,667) square meters, more or less, covered by
Transfer Certificates of Title (TCT) Nos. 200910, 200911, 200912 and 200913 issued
by the Register of Deeds for the City of Makati and a parcel of land located in E.
Rodriguez, Sr. Avenue, Brgy. Kalusugan, Quezon City, with an aggregate area of
Eight Thousand Eight Hundred Nine square meters, more or less, covered by TCT
No. 113585 issued by the Register of Deeds for Quezon City.

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On June 2, 2008, two (2) Joint Development Agreements (JDA) were executed
by and between FLI and MBTC for the construction and development of multi-storey
residential and commercial condominium projects namely: (1) "The Oriental Place" (1
tower) and (2) "The Capital Towers" (3) towers.

Under the JDAs, MBTC, as landowner, shall contribute the parcels of land and
FLI, as developer, shall provide the necessary expertise and resources for the
construction and development of the Project and perform all the development work. In
consideration of, and a return on, the respective contributions of the parties,
specifically designated condominium units and parking slots in the Project will be
allocated in separate ownership between the parties. aSCHIT

For purposes of expediting and facilitating the marketing and sale of the
condominium units and parking slots specifically allocated to MBTC, the
Condominium Certificates of Title (CCT) for the MBTC shall be issued in the name
of FLI but only as Trustee for MBTC. Thus, the CCTs for MBTC's units as
Landowner's shares shall be issued in the name of "FEDERAL LAND, INC. as
Trustee and in Trust for METROPOLITAN BANK & TRUST COMPANY".
Notwithstanding such fact, FLI explicitly acknowledges MBTC's legal right to and
ownership over such properties. While the CCTs covering the condominium units and
parking slots allocated for FLI, as Developer's share, and those covering the open
spaces and common areas of the Project for subsequent transfer to the Condominium
Corporation, will be issued in the name of FLI.

Based on the foregoing representations, you now request for confirmation of


your opinion that:

(1) The June 2, 2008 JDAs between FLI and MBTC will not give rise
to a taxable joint venture as provided under Section 22 (B), in
relation to Section 27 (A) of the Tax Code;

(2) The contribution of MBTC in the form of real properties is not


subject to income tax, creditable withholding tax (CWT), and
value-added tax (VAT) since it does not constitute a sale of
property in the course of trade or business but is a capital
contribution to the Project;

(3) The partition/allocation of saleable condominium units and parking


slots between FLI and MBTC in consideration of their respective
contributions is not a taxable event and is not subject to income

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tax, CWT, VAT and documentary stamp tax (DST) because it is a
mere return of capital that each has contributed to the Project;

(4) The agreement in the JDA that the CCTs for MBTC's units and
parking slots as Landowner's Share in the Project will be issued in
the name of "FLI as Trustee and in Trust for MBTC" is not a
taxable event and is not subject to income tax, WT, VAT and DST,
because it is not a sale and there is no transfer of title from MBTC
to FLI;

(5) The transfer of the title to the land and common areas to the
Condominium Corporation from the Developer is not subject to
income tax, CWT, VAT and DST under Section 196 of the Tax
Code since the transfer is made without monetary consideration;
and

(6) The subsequent disposition by the parties under the JDAs of the
residential and commercial units and parking slots allocated to
them shall be subject to income tax, CWT, VAT and DST under
Section 196 of the Tax Code.

In reply, please be informed that this Office hereby confirms your opinion as
follows:

(1) The unincorporated joint venture arising from the June 2, 2008 JDAs
between FLI and MBTC for the development and construction of the Project, and the
allocation of their respective shares in the units and parking slots in the Project, will
not give rise to a taxable joint venture separate and distinct from the parties, within
the meaning of Section 22 (B), in relation to Section 27 (A) of the Tax Code.

The elements that would characterize a taxable joint venture are as follows
(BIR Ruling No. DA-455-07 dated August 17, 2007):

1. That each party to the venture must make a contribution, not


necessarily of capital, but by way of services, skill, knowledge,
material or money;

2. Profits must be shared among the parties;

3. There must be a joint proprietary and right of mutual control over


the subject matter of the enterprise;

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4. Usually, there is a single business transaction; and

5. An unmistakable intention to form that partnership or joint venture.

However, Section 22 (B) of the Tax Code provides:

"(B) The term corporation shall include 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 operation or consortium
agreement under a service contract with the government. . . . ." ADHcTE

Thus, in BIR Ruling No. DA-356-08 dated June 11, 2008, this Office ruled that
the joint venture between Ayala Land, Inc. ("ALI") and Montecito Properties, Inc.
("MPI") for the joint redevelopment or a residential subdivision known as the
Montecito Estates with MPI as the landowner and ALI as the developer is not a
taxable joint venture. This Office held that:

"Considering therefore, that it is the intention of the legislature to exclude


joint venture or consortium formed for the purpose of undertaking construction
projects from the definition of taxable corporation, this Office hereby opines that
the joint venture by and between MPI and ALI is not subject to income tax under
Section 27 of the Tax Code of 1997, as amended."

Based on the JDAs between FLI and MBTC, no profits will be shared by the
parties because once the development and construction of the Project is completed,
each party will take separate ownership of specifically-identified units and parking
slots in the Project based on their contributions to the Project. Each party will then be
free to sell its share of the units and parking slots to third parties. Hence, the parties
shall be separately subject to the applicable income tax on their taxable income during
each taxable year respectively derived by them from their sales of their share in the
Project. (BIR Ruling DA-196-08 dated March 25, 2008)

Accordingly, the unincorporated joint venture formed pursuant to the JDA


between FLI and MBTC is excluded from the definition of taxable corporations under
Section 27 (A) of the Tax Code and is, consequently, not subject to corporate income
tax. However, FLI and MBTC are separately subject to the applicable income tax on
their taxable income during each taxable year respectively derived by them from their
sales of their share in the Project.
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The JDAs executed by and between FLI and MBTC is neither a contract of
sale over real property nor an instrument which convey title to real property. Hence,
no income tax or DST is due upon the execution of the JVA according to Section 186
of Revenue Regulations No. 26. However, the notarial acknowledgment on the JVA is
subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code, as
amended. (BIR Ruling No. DA-221-08 dated April 9, 2008 and BIR Ruling No.
DA-194-06 dated March 28, 2006)

(2) MBTC's contribution of parcels of land to the Project is not subject to


income tax, CWT and VAT since it does not constitute a sale of property in the
course of trade or business, but is a capital contribution to the Projects which is not a
taxable event.

In BIR Ruling No. DA-319-08 dated May 27, 2008, this Office held:

"ALI did not convey or transfer its ownership or interest over its parcels
of land when it contributed the same to the joint venture but merely pooled its
resources to a common fund, along with that of ONE DELA ROSA for the
purpose of undertaking the construction and development of the Project. These
pooled resources are co-owned by the joint venture partners. The contribution of
land by ALI, as well as that of ONE DELA ROSA of undertaking the
construction and development of the Project, constituted its capital contributions
to the joint venture project, therefore, such contribution is not a taxable event
that will give rise to the payment of regular income tax/creditable withholding
tax. The transfer is also not subject to VAT since the transfer is not in the course
of business but a capital contribution."

(3) The partition/allocation of condominium units and parking slots between


FLI and MBTC in consideration of their respective contributions is not a taxable
event and is not subject to income tax, CWT, VAT and DST, because it is a mere
return of capital that each has contributed to the Project.

Section 36 of Revenue Regulations No. 2, otherwise known as the Income Tax


Regulations, explicitly provides:

"Income, in the broad sense, meaning all wealth which flows into the
taxpayer other than as a mere return of capital. It includes the forms of income
specifically described as gains or profits, including gains derived from the sale or
other disposition of assets."

Being a mere return of the capital that each party contributed to the Projects,

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the allocation of each party's share in the units and parking slots in the Projects does
not yet result in the realization of gain.

In BIR Ruling No. DA-319-08 dated May 27, 2008, it was ruled that the
allocation and distribution of the respective shares of the Developer and Landowner in
the Project in accordance with the JDA in consideration for their respective
contributions under the said agreement is not a taxable event and is not subject to
income tax, CWT, VAT and DST because the allocation is a mere return of capital
that each has contributed. Moreover, the Deed of Partition to be executed to evidence
the allocation and distribution and the issuance of the Condominium Certificates of
Title, being without monetary consideration, is not subject to VAT, income tax, CWT
and DST. However, the notarial acknowledgment to the Deed of Partition is subject to
DST of Php15.00 pursuant to Section 188 of the Tax Code. HEcSDa

(4) The agreement in the JDA that the CCTs for MBTC's units and parking
slots as Landowner's Share in the Project will be issued in the name of FLI as Trustee
and in Trust for MBTC is not a taxable event and is not subject to income tax, CWT,
VAT and DST, because it is not a sale and there is no transfer of title from MBTC to
FLI, but is intended to expedite and facilitate the marketing, sale and disposition of
the units in the Project.

In a similar ruling (BIR Ruling No. DA-196-08 dated March 25, 2008 citing
BIR Ruling No. DA-013-05 dated January 19, 2005), we ruled that:

"The agreement in the July 9, 2007 Supplement to MOA that the CCTs
for HCAI's units and parking slots as Landowner's Share in Cluster C of the
Marquinton Project will be issued in the name of FLI as Trustee and in Trust for
HCAI is not a taxable event and is not subject to income tax, CWT, VAT and
DST, because it is not a sale and there is no transfer of title from HCAI to FLI,
but is intended to expedite and facilitate the marketing, sale and disposition of
the units in Cluster C.

Despite the fact that the CCTs for HCAI's share in the floors and parking
slots in Cluster C will be issued in the name of FLI as Trustee and in Trust for
HCAI, HCAI will maintain separate and legal ownership of its units and parking
slots and, accordingly, all income and expenses related to the sale of its
units/parking slots shall accrue to, and be for its account, and all taxes related
thereto shall be payable and reportable by HCAI."

Further, by virtue of Section 2.3, Article II of the JDA, FLI undertakes to


market the saleable lots allocated to MBTC, the marketing fees, if any, derived by FLI

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thereof shall be subject to income tax imposed under Section 27 (A) of the Tax Code
of 1997, as amended, and consequently, to the withholding tax imposed under
Revenue Regulations No. 2-98, as amended, and to the VAT imposed under Section
108 of the same Tax Code.

(5) The transfer of the titles to the land and common areas to the
Condominium Corporation from the Developer is not subject to income tax, CWT,
VAT and DST under Section 196 of the Tax Code since the transfer is made without
monetary consideration.

Pursuant to BIR Ruling Nos. DA-319-08 dated May 27, 2008 and DA-194-06
dated March 28, 2006, the conveyance of the land and common areas of the Project to
the condominium corporation for the purpose of holding title to such land and
common areas and for such other purposes as may be necessary for the administration
and management of the same pursuant to the Condominium Law is without monetary
consideration and not in connection with a sale. Hence, there is no gain, presumed or
actual, to be realized from the transfer. Thus, it is not subject to income tax, CWT,
VAT and DST, except that the notarial acknowledgment to the Deed of Conveyance
is subject to the DST of P15 pursuant to Section 188 of the Tax Code.

(6) The subsequent disposition by the parties of the units and parking slots
allocated to them shall be subject to income tax, CWT, VAT and DST under Section
196 of the Tax Code based on their respective income, cost basis and expenses in the
Project.

This Office pronounced in several rulings that the subsequent disposition by


the parties under the Joint Venture Agreements of the individual/subdivided lots
allocated to them, the gain that may be realized by them from such sale will be subject
to the regular income tax rate provided under Section 27 (A) of the 1997 Tax Code,
capital gains tax imposed under Section 24 (D) of the same Code, and to the CWT
under Revenue Regulations No. 2-98, as last amended by RR No. 30-2003. Moreover,
said sale shall be subject to the DST imposed under Section 196 of the 1997 Tax
Code based on the gross selling price or fair market value of the properties which ever
is higher. Furthermore, the said sale shall likewise be subject to VAT, as implemented
by R.R. No. 16-2005, as amended by R.R. 4-2007. (BIR Ruling Nos. DA-(JV-023)
178-08 dated August 28, 2008, DA-373-08 dated June 19, 2008, DA-356-08 dated
June 11, 2008, DA-221-08 dated April 9, 2008, DA-556-07 dated October 24, 2007)

This will authorize the Revenue District Officer (RDO) of the revenue district
where the properties are located to issue the corresponding Certificates Authorizing

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Registration (CAR) and Tax Clearance Certificates (TCL) involving the transfer of
the titles to the parties based on their respective allocations pursuant to the Deed of
Partition, without need of the presentation of proof of payment of the CWT, VAT and
the corresponding DST but upon submission of the documentary requirements sets
forth in RMO 18-2009. Provided, that the parties to the joint venture shall cause the
Register of Deeds to annotate on the TCTs that a development project is being
undertaken on the land and is the object of the Joint Venture Agreement between the
parties, and that the joint venture is held to be a tax-exempt entity pursuant to this
Ruling issued by this Office. Provided further, that parties to the joint venture shall
inform the Bureau of Internal Revenue, through the Law Division, of the fulfillment
of the requirement on the distribution of the developed/saleable lots/units in
accordance with the allocation ration in the Joint Development Agreements. For this
purpose, a compliance report of the project indicating the number of lots/units
developed/built, respective TCTs/CCTs and the party in whose name the
corresponding title was issued. ScaEIT

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be disclosed that the facts are different, then
this ruling shall be considered null and void.

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) GREGORIO V. CABANTAC


Deputy Commissioner
Legal and Inspection Group
Bureau of Internal Revenue

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