March 24, 2008

BIR RULING [DA-193-08]

27 (A); DA-097-2001

Grand Monaco Estate Developers, Inc.

No. 49, Sta. Ana St., A. Tuazon Ave.
San Roque, Marikina City

Attention: Mr. Reynaldo A. Carpio

President

Gentlemen :

This refers to your letter dated January 3, 2008 requesting for a ruling
that (1) the joint development of 2-Storey multi-residential units of Grand
Monaco Estate Developers, Inc. (Monaco) and Cesar C. Eribal, landowner, will
not create a taxable joint venture within the meaning of Section 22 (B) in
relation to Section 27 (A) of the National Internal Revenue Code of 1997 and
(2) the allocation of their respective interests in the project and the
execution of the Deed of Partition to implement such allocation, are not
taxable events and are not subject to income/expanded withholding tax,
value-added tax, capital gains tax, donor's tax and documentary stamp tax
under Section 196 of the Tax Code.
It is represented that Grand Monaco Estate Developers, Inc. is a
corporation duly organized, operating and existing under the laws of the
Republic of the Philippines with principal office address at No. 49, Sta. Ana
Street, San Roque, Marikina City; that Monaco is engaged in the business of
construction and real estate development; that Cesar C. Eribal is the
beneficial owner of two (2) parcels of land at Brgy. Bagbag, Quezon City
covered by TCT No. RT-82394 with an area of 1,922 sq.m. and TCT No. RT-
82402 with an area of 1,000 sq.m. with an aggregate area of 2,922 sq.m.;
that Monaco and Cesar C. Eribal entered into a Memorandum of Agreement
for a joint development of said 2-storey multi-residential units; and that the
parties agreed, viz.:
"A. Undertakings and Responsibilities of the First Party (Monaco): HESCcA

1. The FIRST PARTY shall be responsible for the preparation of

designs and plans of the proposed multi residential units and likewise
the specifications for the improvements and facilities referred to herein
duly signed and sealed by all the required respective professionals and
shall also secure all necessary approvals and permits from the
concerned authorities. The FIRST PARTY further agrees and commits
itself to build and construct the multi-residential units and all the
required facilities in accordance with the National Building Code and in
the manner and according to the specifications mentioned in this
Agreement.
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 2. The FIRST PARTY agrees to the relocation survey, subdivision
survey and monumenting of lots, processing and segregating and
titling of individual lots for all the lots subdivided as per approved
plans;

3. The FIRST PARTY shall furnish the materials, labor, equipment,

tools and engineering expertise for the land development aspect of the
project such as the road network, fencing or perimeter, waterlines,
drainage lines, electrical lines, landscaping and beautification of the
project site;

4. The FIRST PARTY, has the sole and exclusive obligation to build
and construct the multi residential units and all the facilities mentioned
and must be within the period specified herein;

5. That the FIRST PARTY guarantees the completion of the

projects within a period of Three (3) years upon release of construction
permit by the Office of the building official. It is understood that the
FIRST PARTY, as the DEVELOPER, shall extend its best effort to fully
developed the property within the specified time. In the event of
however of force majeure such as natural disaster, civil unrest,
insurrections, general strikes, nationwide shortages of construction
materials, runaway inflation (defined as an increase in the consumer
price index by more than 15% per annum) and other legal impediment,
the duration may be extended at a reasonable time to compensate
whatever delays that may have been caused, subject to mutual
arrangement by both parties; SacTCA

6. The FIRST PARTY expressly warrants that all the materials and
other housing components that it will use for construction of the units
shall be of good quality as per agreed specification and all the
construction works shall uniformly comply with generally accepted
principles in engineering and construction and it further warrants to
secure all necessary certificates of completion or occupancy for all said
units.

7. The responsibility of the FIRST Party is to complete the multi-

residential units after which the maintenance of the project from the
time of completion up to the time of turnover shall be covered by a
management fund taken one (1%) percent from the proceeds of the
sale. This fund is to be utilized to maintain the projects (roads, common
areas, and unoccupied units).

8. The FIRST PARTY holds the right to appoint the marketing

group, subject to a fees of twelve (12%) percent. This cover cost of
promotion, commission, incentives and management.

B. Undertakings and Responsibilities of the Second Party:

1. THAT, the SECOND PARTY warrants the validity and legality of

the title and ownership of the above-mentioned property, free from all
liens, restrictions and encumbrances whatsoever. The SECOND PARTY
likewise assures its legal authority to enter agreement with the FIRST
PARTY through a SPECIAL POWER OF ATTORNEY;

2. THAT the SECOND PARTY shall keep up to date the payment of

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 real property taxes until and upon the assignment of lot shares for
each of the parties. All other taxes emanating from land ownership
dues shall be borne by the SECOND PARTY until upon the assignment
of lot shares to both parties;

3. THAT the SECOND PARTY shall undertake to execute the

required deeds (conveyance) or such other deed or documents to
register the titles of the lots in their names or to the FIRST PARTY;

4. THAT the SECOND PARTY upon signing of this Agreement shall

not sell, encumber or otherwise dispose of the properties herein
mentioned to other parties without the knowledge and consent of the
FIRST PARTY; TcCSIa

5. THAT the SECOND PARTY shall make available to the FIRST

PARTY the land to be developed free from any tenants and/or illegal
occupants, and shall insure peaceful and continuous possession of the
land to facilitate the development of the properties and to execute and
deliver to the FIRST PARTY the necessary documents required to
subdivide the land and eventual titling for each of the lot to be
developed;

6. THAT the SECOND PARTY acknowledges the FIRST PARTY'S

rights to protect its investment interest by annotating at the back of
the Original Titles, this Agreement which shall be duly registered by the
Registry of Deeds of Quezon City;

7. That the SECOND PARTY warrant the existing Road Right of

Way shall be permanent easement available for access to and free
passage for the project site and the right of Way for the drainage line,
water lines, power lines, as such, the SECOND PARTY guarantees
perpetuity of usage as this is the only egress. Ingress available.
C. Sharing

The resulting gain in gross value shall be divided on a sharing

ratio of seventy percent (70%) for the FIRST PARTY and thirty percent
(30%) for the SECOND PARTY in such manner with the following further
guidelines:
C.1 That the parties shall sit down and determine their respective
unit shares guided by the principle of fair sharing;
C.2 Titles to lots assigned to the FIRST PARTY shall be released
pro-rata as per work accomplishment. For the purpose of determining
the percentage of accomplishment, the FIRST PARTY shall present a
standard guide of construction to be mutually agreed upon;
C.3 Upon the assignment of the lot shares to the parties, all land
taxes shall be paid by the parties based on their sharing ratio, each
party shall also be responsible for the payment of other taxes on his
share; ScCIaA

C.4 Should there be expenses other than the FIRST PARTY

financial obligation as prescribed herein, the FIRST PARTY may at its
discretion, extend assistance by way of professional services or cash
advance in favor of the SECOND PARTY obligations of settling tax
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 obligation, transfer of Title or among other as may be agreed upon.
Such advances shall be repaid by the SECOND PARTY to the FIRST
PARTY thru assignment of proportionate shares.

In reply, please be informed that pursuant to Section 22 (B) of the Tax

Code of 1997, the term "corporation" shall include 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.
Such being the case, the Joint Venture of Monaco and Cesar C. Eribal is
not subject to the corporate income tax under Section 27 of the Tax Code of
1997. Consequently, gross payments received by said joint venture are not
subject to the 2% expanded withholding tax prescribed under Section 57 (B)
of the Tax Code of 1997 and implemented by Revenue Regulations No. 6-85,
as amended by Revenue Regulations No. 2-98.
The allocation of saleable area of the project between Monaco and
Cesar C. Eribal in consideration of their respective contributions, as
stipulated in the 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. However, upon the 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 regular income tax
rates under Sections 24 and 27 (A) both of the Tax Code of 1997, as the case
may be, and/or to the creditable withholding tax under Revenue Regulations
No. 2-98, as amended. Furthermore, said sale shall be subject to the
documentary stamp tax imposed under Section 196 of the Tax Code of 1997
based on the gross selling price or fair market value of the property
whichever is higher. Moreover, the said sale shall also be subject to value-
added tax. AaSHED

The Partition Agreement whereby Monaco and Cesar C. Eribal will

allocate unto each other their share in the saleable area in consideration of
their respective contributions is not subject to the documentary stamp tax
imposed under Section 196 of the Tax Code of 1997, 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 contributed. However, the acknowledgement on said
Partition Agreement is subject to the documentary stamp tax pursuant to
Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-097-2001 dated
May 28, 2001)
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 services and any
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 person who imports goods shall be subject to VAT imposed in Sections 106
to 108 of the same Tax Code. Hence, by contributing the parcels of land, the
Owner, neither sells, barters, exchanges goods, properties nor renders
service to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November
16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001)
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, this ruling shall be considered null and void.

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service

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