BIR Ruling [DA-099-96]

March 1, 1996 BIR RULING [DA-099-96] Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles 8741 Paseo de Roxas Makati City Attention: Atty . Carlos G . Baniqued and Atty . Priscilla B . Valer Gentlemen : This refers to your letter dated January 24, 1996 requesting for a ruling exempting your client, CitiBank Overseas Investment Corporation (COIC), from the payment of capital gains tax on its sale of its shares of stock in CityTrust Banking Corporation (CityTrust) imposed under Section 25(b) (5) (C) of the Tax Code, as amended and pursuant to Article 14 in relation to the Reservation Clause of the RP-US Tax Treaty. It is represented that COIC is a non-resident foreign corporation organized and existing under the Laws of the State of Delaware, USA; that it does not engage in trade or business in the Philippines; that it owns a total of 4,936,665 common/preferred shares of stock in CityTrust, a domestic corporation engaged in banking business, with a par value of P100.00 per share or a total par value of P493,666,500.00; that COIC is intending to divest some of its shareholdings in order to qualify as a Regulation K Portfolio investment under the United States Laws (i.e., investment with not more than 19.9% voting stock of the corporation); that COIC will sell a total of 2,843,200 common/preferred shares in CityTrust at a price of at least P840.00 per share. In reply, please be informed that the gain which will be realized by COIC from the sale of its shares of stock in CityTrust shall be taxable only in the United States pursuant to Article 14(2) of the RP-US Tax Treaty. Hence, said gain will not be subject to Philippine Tax. cdtech The Reservation Clause of the RP-US Tax Treaty, pertinent portion of which is quoted hereunder as follows: "Article I Notwithstanding the provisions of Article 14 of the Convention relating to capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of a real property interest located in that country. Likewise, both countries may tax gain from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term "real property interest" is to have the meaning it has under the law of the country in which the underlying real property is located." does not apply in this case. It is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consist principally, which means more than 50%, of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in term of value (Sec. 2, Revenue Regulations No. 4-86). The value of the real property interest of CityTrust Banking Corporation located in the Philippines as appearing on its financial statement for the year ending December 31, 1994 is less than 50% of the value of its total assets. However, the sale of the aforementioned shares of stock shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code, as amended. Finally, upon presentment of a proof that the documentary stamp tax on the sale of shares of stock has been paid, the corporate secretary of CityTrust may cause the registration of the sale of the shares of stock from COIC to the buyer in the Stock and Transfer Book of the corporation and cancel and issue new Stock Certificates in the name of the buyer. (BIR Ruling No. 082-91 dated May 14, 1991) cdta Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)