August 17, 2007 BIR RULING [DA-455-07] RA 4726; Sec.

188, NIRC; BIR Rulings DA-662-99; DA-056-2003; DA-047-2004 Pacis & Reyes Attorneys-at-Law 8th Floor Chatam House 116 Valero Street (corner V.A. Rufino Street) Salcedo Village, Makati City Attention: Attys. Antonio C. Pacis & Ma. Resa S. Celis Gentlemen : This refers to your letter dated June 1, 2007, requesting on behalf of your client, G & W Architects, Engineers and Project Development Consultants, confirmation of the following: 1. The BTO System implemented in Kensington Condominium Project as herein discussed does not constitute a joint venture. aICHEc 2. The conveyance of the Condominium Units and Parking Units by the Trustee to the individual Trustors would not be subject to any tax imposed under the Tax Code inclusive of expanded value-added tax and the documentary stamp tax on deeds of sale and conveyance of real property imposed under Section 196 of the Code; and 3. The conveyance of the common areas of the Project by the Trustee to the Condominium Corporation would not be subject to any tax imposed under the Tax Code inclusive of expanded value-added tax and the documentary stamp tax imposed under Section 196 of the same Code. Facts These are the antecedent facts as found in Kensington Ruling and reiterated in counsel's letter request G & W Architects, Engineers and Project Development Consultants (hereinafter GW or Trustee) is a professional partnership duly organized and existing under and by virtue of the laws of the Republic of the Philippines. GW adopted a tax efficient, innovative approach to commercial, office and residential condominium ownership adapted from the Spanish model practiced for twenty-five (25) years known as the Regimen de Comunidad de Proprietario ("Private Ownership Community"). This model was modified to take into account the relevant laws, regulations and practices in the Philippines. It was first utilized in the Philippines by Comunidades Developers, Inc. as it acted as the project proponent of the Parque Espana Condominium Project located at Filinvest Corporate City in Alabang. 1 TECIHD Thereafter, GW adopted the Private Ownership Community model, calling it the Build To Own (BTO) System. Under this System, GW implemented and constructed its maiden project, Penhurst Parkplace Condominium, located at the Fort Bonifacio Township. Having successfully implemented the Penhurst Parkplace Condominium Project under the BTO System, 2 GW undertook to act as project proponent/organizer of the Kensington Place Condominium Project likewise located at the Fort Bonifacio Township.

Similar to the Parque Espana and Penhurst Park-place projects, GW identified a parcel of land then covered by Transfer Certificate of Title No. 35849 of the Registry of Deeds for Taguig (the Subject Land) on which the Kensington Place Condominium Project (the "Project") would be established. GW found clients who themselves undertook and participated in the collective development of the Project and who would eventually become the owners of the individual units which comprise the same (the "Clients"). The Clients hired GW to act as project manager. To begin the Project, each Client entered into a Contract to Manage and Execute the Construction of Kensington Place Condominium (the Contract). 3 In said Contract, each Client undertook to collectively develop the Project and to put up his/her respective construction funding contributions for the same. In return for such participation and as part of his/her interest in the Project, each Client was assigned specific condominium units and parking units in the Project (the Condominium Units and Parking Units). In addition, each Client was to have a proportionate undivided interest in the common areas of the Project, which common areas include the Subject Land (the Common Areas). EAICTS For its part GW was given a mandate to manage and execute the development of the Project and in connection thereto, to execute acts on behalf of and for the collective benefit of the Clients. GW, however, did not and does not assume the role of developer and hence, has not made any representation that it is, in its own capacity, selling the units comprising the Project. Under the terms of the Contract, each Client agreed that prior to the actual division of the Project into individual units, their respective interests in the Project would consist in a pro-indiviso, prorata share, held collectively with the other Clients. Realizing, however, that it would be cumbersome and administratively difficult for all the Clients to be named as owners of the Subject Land and the Project, the Clients appointed GW, as Trustee, for the purpose of allowing the Trustee to hold title to the Subject Land and the Project. GW was thus instructed under the Contracts, to purchase and hold title to the Subject Land for the collective benefit of the Clients and in proportion to their respective interests in the Project. (A form copy of the Contract executed by GW and the Clients is attached hereto as Annex "C"). To facilitate the collection and allocation of construction funding payments from the Clients to the Project's suppliers and service contractors, separate Depository and Disbursing Agreements (hereinafter, the Disbursing Agreements) were executed by each Client with the Banco de Oro Universal Bank-Trust Banking Group (the Bank). SaIACT Simultaneous to execution of Disbursing Agreements, Clients remitted their respective initial construction funding payments to the Bank with the instructions for the Bank to disburse the funds, among others, for the necessary payments in connection with the construction and development of the Project and the purchase of the land where the Project will be situated, in accordance with the instruction of the Trustee. Moreover, the Bank was instructed to hold and disburse the funds as and when necessary for the development of the Project using the Clients' additional construction funding payments. (A form copy of the Disbursing Agreement is attached hereto as Annex "D"). In accordance with such directions, the Trustee then purchased the Subject Land covered by Transfer Certificate Title (TCT) No. 35849. (Copies of TCT No. 35849 and the Contract to Sell executed by Trustee and Fort Bonifacio Development Corporation, are attached hereto as Annexes "E" and "Y," respectively). As part of its function, GW was mandated to effect the condominiumization of the Project and obtain necessary registrations for the same and the individual Condominium Certificates of Title for the Condominium and Parking Units and the Common Areas. Finally, under the terms of the Contract, upon completion of the Project, the Trustee was to execute deeds conveying in favor of

the Clients their respective Condominium and Parking Units and the Common Areas in favor of a Condominium Corporation. BIR Reply We reply as follows: 1. The Private Ownership Community/BTO System which was characterized as joint venture in Kensington Ruling, 4 did not constitute a joint venture. ECSHAD The Private Ownership Community Model/BTO System which was adopted both in Parque Espana and Penhurst projects, was impliedly characterized as a co-ownership undertaking by and among the individual Participants-Beneficial Owners-Trustors where the project proponent/organizer thereof was appointed as Trustee who holds the title to the subject properties/projects in such capacity. In Kensington Ruling, the BTO System was characterized as a joint venture entered into by the Clients (or unit owners). This prompted this Office to revisit all the rulings covering the aforementioned projects. In fine, to ascertain the nature of the undertaking entered by and among the participants-beneficial owners, we refer to various commentaries and Court decisions characterizing a joint venture or copartnership arrangement. Defining a joint venture, in relation to Section 22 (B) of the Tax Code of 1997, as amended, a Philippine tax commentator has written: "(t)o constitute a "joint venture", certain factors are essential. Thus, each party to venture must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, material or money; 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 a single business transaction." 5 Another cites various landmark Philippine cases touching on joint venture, to wit: aTADCE

"In Obillos vs. Commissioner (L-68118, 19 October 1985, 139 SCRA 436), however, the Supreme Court, applying Art. 1769 of the Civil Code, said that the sharing of gross returns does not of itself establish a joint partnership whether or not the persons sharing them have a joint or common right or interest in the property from which the returns are derived. There must, instead, be an unmistakable intention to form that partnership or joint venture. A sale of a co-ownership property at a profit does not necessarily establish that intention. "The Court similarly ruled as above in Pascual vs. Commissioner (G.R. No. 78133, 18 October 1988, 166 SCRA 560), where two persons purchased two parcels of land in 1965 and another three parcels in 1966, which they later all sold at a profit. To paraphrase the court: The purchase of two parcels of land followed a year later by another three parcels of land and the sale thereof by two individuals (the first two parcels in 1968 and the three remaining parcels in 1970) at a profit (for which the capital gains tax was paid), without further evidence that they entered into an agreement to contribute money, property or industry to a common fund with the intention to divide the profits between themselves, are insufficient factual settings to hold them as having formed a partnership. The character of habituality peculiar to business transactions for the purpose of gain must be present to consider them so. Where the transactions are isolated, in the absence of other circumstances showing a contrary intention, the case can only give rise to co-ownership. The sharing of returns does not itself establish a partnership which is but a consequence of a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property." 6

Pascual cited with approval the concurring opinion of Mr. Justice Angelo Bautista in Evangelista v. Collector, G.R. No. 9996, Oct. 15, 1957, 102 Phil. 140. ADCSEa "It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain real estate for profit in the absence of other circumstances showing a contrary intention cannot be considered a partnership. Persons who contribute property or funds for a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution, but who severally retain the title to their respective contribution, are not thereby rendered partners. They have no common stock or capital, and no community of interest as principal proprietors in the business itself which the proceeds derived. (Elements of the Law of Partnership by Floyd D. Mechem 2 d Ed., section 83, p. 74) A joint purchase of land, by two, does not constitute a co-partnership in respect thereto, nor does an agreement to share the profits and losses on the sale of land create a partnership; the parties are only tenants in common. (Clark vs. Sideway, 142 US 682, 12 Ct. 327, 35 L. Ed., 157.) THCSEA Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as tenants in common, and to divide the profits of disposing it, the brother and the other not being entitled to share in plaintiffs commission, no partnership existed as between the three parties, whatever their relation may have been as to third parties. (Magee v. Magee 123 N.E. 673, 233 Mass. 341.) In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally participating in both profits and losses; (c) and such a community of interest, as far as third persons are concerned as enables each party to make contract, manage the business, and dispose of the whole property. (Municipal Paying Co. vs. Herring 150 P. 1067, 50 I11470) The common ownership of property does not itself create a partnership between the owners, though they may use it for the purpose of making gains; and they may, without becoming partners, agree among themselves as to the management, and use of such property and the application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363, 160 No. App. 14)." 7 (Emphases supplied) Premised on the foregoing, the following elements would characterize a joint venture: SCADIT

(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 interest and right of mutual control over the subject matter of the enterprise; (4) (5) Usually there is a single business transaction; and An unmistakable intention to form that partnership or joint venture;

However, there should be a clear distinction between a joint venture and joint ownership. Certain US cases on the matter so state that "(a)n important distinction is to be noted between joint venture and joint ownership. Similarity appears in the common interest, but a difference arises

because the latter lacks the feature of a venture. Hence, the law does not regard joint owners or tenants in common as joint venturers in the absence of some express or implied agreement for a joint enterprise. Thus, the mere purchase of property by several persons, each contributing a portion of the purchase price, makes them co-tenants but not joint venturers." 8 Similarly, "the mere purchase of property by two persons each of whom contributes a portion of the purchase price makes them joint owners of the property but does not establish between them the relation of joint venturers, and an agreement between two or more persons that each shall contribute a certain sum of money toward the purchase of articles or personal property, for which a joint bid is to be made, but the separate articles of which, if the bid shall have been accepted, are to be distributed and owned by them in severalty, does not constitute a joint venture." 9 The standard joint venture model ordinarily involves a landowner contributing his property, and a developer contributing the development funds and expertise in developing the condominium or subdivision project. Upon the completion of the condominium or subdivision project, an agreed portion of the finished units or subdivision lots are assigned to each co-venturer for eventual resale to third parties. In the instant case, the Subject Property was purchased on installment from the Fort Bonifacio Development Corporation by GW, acting as trustee in behalf of the Clients. Thereafter, upon the completion of the Project, to each Client was conveyed their respective condominium unit. TAacCE Likewise, there is also a need to distinguish a joint venture from a relationship with an independent contractor. Thus, "(a) joint venture is to be distinguished from a relationship of an independent contractor, the latter being one who, exercising an independent employment, contracts to do work according to his methods and without being subject to the control of his employer except as to the result of the work, while a joint venture is a special combination of two or more persons where, in some specific venture, a profit is jointly sought without any actual partnership or corporate designation." 10 Considerably, the BTO as implemented in the Kensington Condominium Project does not provide for the sharing of profits among the parties. As represented, GW, as project manager charged a professional fee from each client the equivalent of a percentage of each Client's total construction funding contributions. Neither did the Clients derive profit from the development of the condominium project to them were merely conveyed their respective condominium units in accordance with their respective Contracts. Furthermore, while a co-ownership over the subject property was created when GW purchased the Subject Land in its capacity as trustee of all the Clients, this did not necessarily give rise to the right of mutual control over the subject matter of the enterprise. Rather, each Client contractually engaged GW and appointed it as trustee and attorney-in-fact to purchase the land in the client's collective behalf, construct the Project and finally convey the finished Units to each Client and the common areas, to the condominium corporation. CTaSEI Finally, there was no intention to form a partnership or venture among the parties. Each client has entered into a separate Contract with GW but did not contract with each other. GW, however, did not and does not assume the role of developer and hence has not made any representation that it is, in its own capacity, selling the units comprising the Project. It was hired the project manager for which it charged a professional fee from each Client. Thus, the elements of joint venture are not present in the instant case. In consideration of the foregoing, this Office is constrained to adopt the same treatment applied in Parque Espana and Penhurst rulings to Kensington Project. Indeed, while all three projects have consistently adopted the Private Ownership Community Model/BTO System, the BTO System in Kensington Project was treated as a joint venture which treatment was not in accordance with the parties' intention.

It must be emphasized, however, that notwithstanding this recommendation, all the BIR rulings mentioned will nonetheless undergo review by the BIR Ruling Review Committee. The Committee will further deliberate and discuss the true characterization of BTO System. 2. The conveyance of condominium units by the Trustee to the individual Trustors pursuant to the terms of the Contract and without consideration is not subject to capital gains tax/regular income tax, VAT nor to DST imposed under the Tax Code of 1997, as amended. In the implementation of BTO System in the Kensington Condominium Project, each Client contractually engaged the services of GW to manage and execute the development of the Project, and in connection thereto, to execute acts on behalf of and for collective benefit of the Clients; and finally, to convey the finished units to each client. Hence, GW was appointed as attorney-in-fact to purchase the land for and on clients' collective behalf. Realizing, further, that it would be cumbersome and administratively difficult for all the Clients to be named as owners of the Subject Land and the Project, GW was also appointed as Trustee for the purpose of allowing GW to hold title to the Subject Land and consequently, for Client's collective benefit, in proportion to their respective interests in the Project. Each Client entered into a separate Contract with GW but did not contract with each other. While GW holds legal title to the Subject Land and the Project, it merely does so in the capacity of a trustee. It is noted also that the payment received by GW from its Clients-Trustors was in the nature of professional fee (i.e., the equivalent of a percentage of each Client's total construction funding contributions) as project manager. In short, Clients-Trustors are the real owners of the Kensington Place Condominium Project, the fund for the acquisition of the Subject Land and construction thereof being provided by them. Conclusively, each individual Client-Trustor is the beneficial owner of a pro-indiviso, pro-rata share in the condominium units, held collectively with other Clients-Trustors. Consequently, the conveyance of said condominium units by Trustee GW to its Clients-Trustors, without consideration, would not be subject to either the capital gains tax or the creditable withholding tax imposed under the Tax Code of 1997, as amended, and as implemented by Revenue Regulations No. 2-98, as amended. Nor to the value added tax imposed under Section 106 of the same Tax Code. Neither would it be subject to the 1.5% documentary stamp tax imposed under Section 196 of the same Code. However, each conveyance shall be subject to the documentary stamp tax on certificates in the amount of Fifteen Pesos (PhP15.00) imposed by Section 188 of the Tax Code of 1997, as amended. 3. The conveyance of the Common Areas of the Project by the Trustee to the Condominium Corporation is not subject to capital gains tax and documentary stamp tax on deeds of sale and conveyance of real property imposed by Section 196 of the Tax Code of 1997, as amended. The conveyance of common areas in a condominium project to the Condominium Corporation made by the Trustee and without any consideration is not subject to capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997, as amended, nor to the DST on deeds of sale and conveyance of real property imposed under Section 196 of same Code. Moreover, said conveyance being made in compliance with the requirements of R.A. 4726 (The Condominium Act), purposely, for the management of the Project for the common benefit of the unit owners, who likewise hold a percentage share of the common land on which the condominium building stands and the common areas and appurtenances of said condominium building, and without consideration since no income therefrom would be generated by the Trustee, is not subject to capital gains tax or creditable withholding tax. However, it is subject to the documentary stamp tax on certificates in the amount of Fifteen Pesos (Php15.00) imposed under Section 188 of the Tax Code of 1997, as amended.

This ruling is being issued based on the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts as represented are different, this ruling shall considered null and void. cSTHaE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. BIR Ruling DA-662-99 dated November 29, 1999. 2. BIR Ruling DA-056-2003 dated February 24, 2003. 3. BIR Ruling DA-047-2004 dated December 2004. 4. BIR Ruling No. DA-047-2004, supra. 5. Mamalateo, Victorino C., Philippine Income Tax, Rex Printing Company, Inc., 2005, p. 44. 6. Vitug, Jose C. and Acosta, Ernesto D., Tax Law and Jurisprudence, Rex Printing Company, Inc. 2006, pp. 61-62. 7. Pascual v. The Commissioner of Internal Revenue and the Court of Tax Appeals, supra. 8. 46 Am Jur 2d, 27. 9. 48A CJS, 404-5. 10. Albina Empire & Machine Works, Inc. v. Abel (CA 10 Okla) 305 F2d77, cited in 46 Am Jur 2d, 24.