BIR Ruling [DA-039-98]

February 5, 1998 BIR RULING [DA-039-98] Quisumbing Torres & Evangelista 11th Floor, Pacific Star Bldg. Makati Ave. cor. Sen. Gil J. Puyat Ave. Makati City Attention: Attys . Ruby S . Nitorreda and Jonathan P . Serrano Gentlemen : This refers to your letter dated November 26, 1997 requesting, on behalf of your client, Suez Lyonnaise Des Eaux (SLDE) , for confirmation of your opinion that the proposed sale of its shares of stock in Maynilad Water Services, Inc. (MWSI) [formerly Benpres-Lyonnaise Water Works, Inc.] to Lyonnaise Asia Water (Holdings) Pte . Limited (LAWH) is not subject to capital gains tax imposed under Section 25(b)(5)(C) of the Tax Code, as amended [now Section 28(B)(5)(c) of the Tax Code of 1997] and pursuant to Article 13(1), (2) and (3) of the RP-France Tax Treaty. LLpr It is represented that SLDE is a non-resident corporation organized and existing under the laws of France with office address at 72, Avenue de la Liberte, 92753 Nanterre Cedex, France; that it is not engaged in trade or business within the Philippines and without a permanent establishment in the Philippines; that SLDE owns 40% (6,000,000 shares with par value of P100.00 per share) of the issued and paid up capital stock of MWSI, consisting of all of the issued and outstanding class B shares; that pursuant to the proposed share Sale and Purchase Agreement between SLDE and LAWH, a corporation duly organized and existing under the laws of Singapore, SLDE will sell 50% of its shares in MWSI to LAWH; that the assets of MWSI do not principally consist of immovable property; and that in support of your request, you have attached the following documents: (1) Copy of the proposed share Sale and Purchase Agreement between SLDE and LAWH; (2) Certified true copy of the Articles of Incorporation and the SEC Registration of MWSI; (3) Certification from the SEC that SLDE is not registered to do business in the Philippines; and (4) Original Secretary's Certificate of MWSI stating the number and value of the shares of SLDE and the percentage of the latter's ownership in MWSI. In reply, please be informed that pursuant to Article 13, paragraphs (1), (2) and (3) of the RP-France Tax Treaty states, viz: "ARTICLE 13 "Capital Gains "1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6 or from the alienation of shares or comparable interest in a real property cooperative or in a company the assets of which consist principally of immovable property, may be taxed in the Contracting State in which such property is situated. "2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing professional service, including such gains from the alienation of such permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in the other State. However, gains derived by an enterprise of a Contracting State from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships or aircraft, shall be taxable only in that State. "3. Gains from the alienation of any property other than those mentioned in paragraphs 1 and 2, shall be taxable only in the Contracting State of which the alienator is a resident. xxx xxx xxx" It is clear from the above-cited provisions, that the gains which will be realized by SLDE from the sale of shares of stock in MWSI to LAWH shall be taxable only in France, where the alienator is a resident. (Article 13, paragraph 3 of the RP-France Tax Treaty) Accordingly, this Office hereby confirms your opinion that the gains to be realized by SLDE from the proposed sale of its shares of stock in MWSI to LAWH will not be subject to the capital gains tax imposed under Section 25(b)(5)(C) of the Tax Code, as amended [now Section 28(B)(5)(c) of the Tax Code of 1997]. (UN-296-95 dated August 11, 1995) However, the said transfer will be subject to the documentary stamp tax equivalent to P1.50 for every P200.00 or a fraction thereof of the par value of the shares imposed under Section 176 of the Tax Code, as amended [now Section 176 of the Tax Code of 1997]. Upon presentment of the proof of payment of the documentary stamp tax, the Corporate Secretary of MWSI can register the transfer of the shares from SLDE to LAWH in their respective Stock and Transfer Books and cancel and issue new stock certificates in the name of the buyer. 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. aisadc Very truly yours, (SGD.) SIXTO ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)