BIR Ruling [DA-086-96]

February 26, 1996 BIR RULING [DA-086-96] Belo Gozon Elma Parel Asuncion & Lucila 15/F, Sagittarius Condominium H.V. dela Costa St., Salcedo Village Makati City 1227 Attention: Attys . R . V . Lucila and B . T . Saulog Gentlemen : This refers to your letter dated January 21, 1995 requesting for a confirmation of your opinion to the effect that the transfer by Ribadeo B.V. of its 750,000 CLASS "B" Common shares in Express Telecommunication Co., Inc. (Extelcom), a domestic corporation, to Aperea B.V. is not subject to documentary stamp tax and capital gains tax pursuant to Article 13(4) of the RP-Netherlands Tax Treaty, and that there is no need to secure from this Office a certificate of authority to register the said transaction in the corporate books of Extelcom. It is represented that Ribadeo B.V. is a corporation organized and existing under the laws of the Republic of Netherlands; that it is the beneficial owner of 750,000 Class "B" common shares in Extelcom, a domestic corporation engaged in telecommunications service; that by virtue of an agreement entitled "Agreement For Contribution in Kind" dated January 19, 1996, Ribadeo B.V. transferred the subject shares in favor of Aperea B.V., a corporation organized and existing under the laws of the Republic of Netherlands; and that said agreement was executed outside of the Philippines by two non-resident corporations not doing business in the Philippines, namely, Ribadeo B.V. and Aperea B.V. In reply, please be informed that Article 13 of the RP-Netherlands Tax Treaty provides as follows: "Article 13 GAINS FROM THE ALIENATION OF PROPERTY "1) Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the 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 one of the States has in the other State, or of movable property pertaining to a fixed base available to a resident of one of the States in the other State for the purpose of performing professional services, 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. "3) Notwithstanding the provisions of paragraph 2, gains derived by an enterprise of one of the States 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. "4) Gains from the alienation of any property other than those mentioned in paragraphs 1,2 and 3, shall be taxable only in the State of which the alienator is a resident . "5) The provisions of paragraph 4 shall not affect the right of each of the States to levy according to its domestic law a tax on gains from the alienation of any property derived by an individual who is a resident of the other State and has been a resident of the first mentioned State at any time during the six years immediately preceding the alienation of the property." (Emphasis supplied). It is clear from the aforequoted provisions of the RP-Netherlands Tax Treaty that capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of Article 13 of the tax treaty shall be taxable only in the State where the alienator is a resident. Considering that the transfer of shares of stock is not among those mentioned in said paragraphs 1, 2 and 3 of Article 13 of the tax treaty, the gains that may be derived by Ribadeo B.V., which is a resident of Netherlands, from the transfer of its Extelcom shares to Aperea B.V., shall not be subject to Philippine income tax under Section 25 (b)(5)(C)(i) of the Tax Code, as amended, but are subject to tax only in the Netherlands. However, the said transfer of 750,000 Extelcom shares is subject to the documentary stamp tax in accordance with Section 176 of the Tax Code, as amended by Republic Act No. 7660. This ruling is being issued on the basis of the facts as represented. However, if upon investigation it would be disclosed that the facts are materially different, then this ruling shall be considered as automatically revoked. (BIR Ruling No. 09-96 dated January 23, 1996) cdtech Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)