September 15, 2009

BIR RULING [DA-(JV-021) 544-09]

22 (B); DA-373-2008

CKL Real Estate Corp.

Cherry Court Bldg.
Gen. Maxilom Ave.
Cebu City

Attention: Mr. Ken A. Salimbangon

Chief Operating Officer

Gentlemen :

This refers to your undated letter requesting in effect, for an opinion on

the exemption from payment of capital gains tax and documentary stamp
tax on the development of several properties under a joint venture
arrangement.
Documents submitted show that Pilar Yap Elpa (Landowner) is the
registered and absolute owner of three (3) parcels of land covered by
Transfer Certificates of Title (TCT) Nos. 21765, 21766 and 21767 (Subject
Properties) situated at Brgy. Mactan, Cebu City. On the other hand, CKL Real
Estate Corp. (hereinafter the Developer) is a domestic corporation interested
in developing the Subject Properties, horizontally and vertically, and has, for
this purpose, offered to the Landowner to develop the same thru a Joint
Venture Agreement (JVA) with the following terms and conditions:
a) That the Landowner would contribute to the JVA its real properties;
b) That the Developer would develop the Subject Properties into a
residential subdivision (the Project) and all cost and expenses for
the development would be at its sole account; IcEACH

c) That the resultant saleable lots would be shared by each party in

accordance with the following sharing agreement:
• Pilar Yap Elpa - 29%
CKL Real Estate
• - 71%
Corp.
d) That each of the parties are in control with respect to the sale and
disposition of their respective shares.
In order for the parties to completely exercise their relevant rights to
sell or dispose the lots as their share in the JVA, it is necessary that title to
the lots being the share of the Developer be transferred in its name.
Parties agree to execute the Sharing Agreement, whereby the shares
of the Developer would be assigned and titles thereto will be transferred and
registered in its name.
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 Neither parties derived any profit or gain from the transfer as it is only
made to segregate or apportion between themselves their shares on the
developed lots. SHCaEA

In reply, please be informed as follows:

Pursuant to Section 22 (B) of the Tax Code of 1997, the term
corporation includes partnership, 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.
P.D. No. 929 amended the definition of the taxable corporation so as
not to include joint venture formed for the purpose of undertaking
construction projects. The reasons for such amendment are: (1) Local
contractors contribute substantially to the development program of the
country; (2) Local contractors are at a disadvantage in competitive bidding
with foreign contractors in view of limited capital and financial resources; (3)
In order to be able to compete with big foreign contractors, it may be
necessary for them to enter into joint ventures to pool their limited resources
in undertaking big construction projects; (4) To assist them in achieving
competitiveness with foreign contractors, the joint ventures formed by them
should not be considered an additional income tax lien.
Considering the clear provision of Sec. 22 (B) which manifests the
intention of the legislature to exclude from the definition of taxable
corporation joint venture/s (or consortium) formed for the purpose of
undertaking construction projects, this Office hereby confirms your opinion
that the joint venture of the Landowner and the Developer is not a
corporation subject to corporate income tax. However, for VAT purposes, the
joint venture (or consortium) is by itself a taxable entity. (BIR Ruling No. DA-
373-2008 dated June 19, 2008)
The allocation of the lots in the Project between the Landowner and the
Developer, in consideration of their respective contributions, as stipulated in
their agreement is not a taxable event and is not subject to income tax or
any withholding tax because the allocation is a mere return of capital that
each has contributed. (BIR Ruling No. DA-192-2001 dated October 17, 2001)
EcIDaA

The transfer is also not subject to VAT since under Section 105 of the
Tax Code of 1997, any person who, in the course of trade or business, sells,
barters, exchanges, leases goods or properties, renders service and any
person who imports goods shall be subject to VAT imposed in Sections 106
to 108 of the same Tax Code, as amended. Hence, by contributing its
parcels of land, the Landowner, neither sells, barters, exchanges goods,
property nor renders service to be subject to VAT. (BIR Ruling No. DA-240-
2001 dated November 16, 2001)
The Sharing Agreement whereby the Landowner and the Developer will
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 allocate unto each other their shares in consideration of their respective
contributions is not subject to the documentary stamp tax imposed under
Section 196 of the Tax Code of 1997, as amended, income tax and any
withholding tax because the allocation is made without monetary
consideration and is not in connection with a sale. The partition is made
merely to segregate the saleable area between the parties, as the return of
the capital which each has contributed. However, the acknowledgment to
said Sharing Agreement is subject to the documentary stamp tax pursuant
to Section 188 of the Tax Code of 1997, as amended.
It is understood however, that upon subsequent disposition by the co-
venturers of the areas allocated to them, the gain that may be realized by
them from such sale will be subject to the expanded withholding tax under
Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital
gains tax under Section 27 (D) (5), as the case may be. Moreover, such sale
shall be subject to the documentary stamp tax imposed under Section 196
of the Tax Code of 1997, as amended, based on the gross selling price or fair
market value of the properties, whichever is higher. Furthermore, the said
sale shall likewise be subject to VAT.
This will authorize the Revenue District Officer (RDO) of the revenue
district where the properties are located to issue the corresponding
Certificate Authorizing Registration (CAR) and Tax Clearance Certificate
(TCL) involving the transfer of the titles to the parties based on their
respective allocations pursuant to the Sharing Agreement, without need of
the presentation of proof of payment of the expanded withholding tax,
value-added tax and the corresponding documentary stamp tax. Provided,
that the parties to the joint venture shall cause the Register of Deeds to
annotate on the TCT that a development project is being undertaken on the
land and is the object of the joint venture between the parties, and that the
aforestated 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 lots in accordance
with the allocation ratio in the JVA. For this purpose, a compliance report of
the project indicating the number of lots developed/built, the respective
TCTs and the party in whose name the corresponding title was issued. (BIR
Ruling No. DA-373-2008 dated June 19, 2008) EHaCTA

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

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