BIR Ruling [DA-105-98]

March 26, 1998 BIR RULING [DA-105-98] Quisumbing Torres & Evangelista 11th Floor, Pacific Star Building Makati Ave. cor. Sen. Gil Puyat Ave. Makati City Attention: Attys . Jose R . Sandejas and Ruby S . Nitorreda Gentlemen : This refers to your letter dated February 13, 1998 requesting confirmation of your opinion to the effect that the transfer by Sony Corporation (Sony Corp.) of its shareholdings in Sony Philippines, Incorporated (SPH) in favor of Sony Holding (Asia) B.V. (Sony Holding), is not subject to capital gains tax. aisadc It is represented that SPH is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that Sony Corp. is a corporation organized and existing under the laws of Japan; that Sony Holding is a private limited company organized and existing under the laws of the Netherlands; that Sony Corp. holds 17,420,000 shares of stock in SPH; that Sony Corp. intends to execute a Deed of Assignment of Shares with Sony Holding, assigning the said shares to the latter; and that the property of SPH does not consist principally of immovable property situated in the Philippines. In reply, please be informed that Article 13 of the RP-Japan Tax Treaty provides, viz : "ARTICLE 13 "(1) Gains derived by a resident of a Contracting States 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 base, may be taxed in 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 in 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 above transaction involving transfer of shares of stock of SPH, a domestic corporation, does not fall under paragraphs 1, 2 and 3 abovequoted. Neither does it fall under paragraph 4 because it has been ascertained from the current financial statements of SPH that its immovable property does not consist "principally" of immovable property situated in a contracting state, meaning in the Philippines. Such being the case, the transaction falls within the purview of paragraph 5. Accordingly, and considering that Sony Corp., the alienator, is a resident of Japan, the capital gain, if any, derived by it from the transfer of its SPH shareholdings to Sony Holding is subject to tax only in Japan. Said gains, therefore, are not taxable in the Philippines. (BIR Ruling No. 071-90 dated May 10, 1990) The Deed of Assignment of Shares is subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. aisadc This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different from that as represented, then this ruling shall be considered as null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)