BIR Ruling [DA-058-98]

January 18, 1998 BIR RULING [DA-058-98] Topmax Philippines, Inc. Suite 7D, Strata 200 Building Emerald Avenue, Ortigas Complex Pasig City Attention: Mr . Cesar M . Gatmaytan, Jr . Gentlemen : This refers to your letter dated February 2, 1998 requesting for ruling as to whether the gains, if any, arising from the sale by Mr. Hyozaburo Kawamura of his shares of stock in Topmax Philippines, Inc. (TOPMAX) to Canon, Inc. are exempt from Philippine income tax pursuant to the RP-Japan Tax Treaty. cdta It is represented that Mr. Kawamura is the registered owner of Thirteen Thousand Five Hundred (13,500) shares of Topmax Philippines, Inc., a corporation duly organized and existing under Philippine laws; that on January 9, 1998, Mr. Kawamura transferred six thousand eight hundred eighty-five (6,885) shares of TOPMAX to Canon, Inc., a corporation duly organized and existing under the laws of Japan; that the documentary stamp tax due on the transaction was duly paid on January 9, 1998 and that at the time of the transfer, TOPMAX does not have any real property asset as shown by its 1996 audited financial statement. In reply, please be informed that pursuant to Article 13 of the RP-Japan Tax Treaty, stating: "ARTICLE 13 "(1) Gains derived by a resident of a Contracting State from the alienation of immovable property as defined in paragraph (2) of Article 6 and situated in the other Contracting State may be taxed in that other Contracting State. "(2) Gains from the alienation of any property, other than immovable 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 any property, other than immovable property, pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed based, may be taxed in the that other Contracting State. "(3) Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic and any property, other than immovable property, pertaining to the operation of such ships or aircraft shall be taxable only in that Contracting State. "(4) Gains from the alienation of shares of a company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed on that Contracting State. "(5) Gains from the alienation of any property other than those referred to in paragraphs (1), (2), (3) and (4) shall be taxable only in the Contracting State of which the alienator is a resident." the gains that will be realized by Mr. Kawamura from his sale of shares of stock in Topmax Philippines Inc. to a Japanese company shall be taxable only in Japan. However, under the aforequoted provision of paragraph 4 supra , which is similar to the Reservation Clause of the RP-US Tax Treaty, the Philippines may tax the gains derived from the disposition of interest in a corporation if its assets consist principally of real property interest located in the Philippines. The term "Real Property Interest" means interest on properties enumerated in Section 3 of Revenue Regulations No. 4-86 which are not, however, exclusive of others that are similarly situated. As used in the treaties and in the Regulations, it shall be understood to include real properties as understood under Philippine Laws. Moreover, "Principally" means more than 50% of the entire assets in terms of value (Sec. 2(a) and (b), Revenue Regulations No. 4-86) cdti Accordingly, the gains if any to be realized by Mr. Kawamura from the sale of his shares of stock in Topmax Philippines, Inc. to Canon, Inc., a Japanese corporation, is not subject to Philippine income tax but subject to the documentary stamp imposed under Section 176 of the Tax Code of 1997. (BIR Ruling No. 007-96 dated January 18, 1996) 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. cdt Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)