BIR Ruling [DA-121-97]

March 21, 1997 BIR RULING [DA-121-97] First Philippine Consultants, Inc. 9th Floor Penthouse 2nd Deck Salamin Bldg., 197 Salcedo St. Legaspi Vill., Makati City Attention: Ms . Conchita Manabat President Gentlemen : This refers to your letter dated February 14, 1997 requesting on behalf of your client, Fujitsu Limited, for a ruling that the transfer by your said client of its shares of stock held in a Philippine company which will be executed abroad is not subject to any Philippine tax. prll It is represented that Fujitsu Limited is a non-resident foreign corporation organized under the laws of Japan; that it is not doing business in the Philippines and has no permanent establishment in the country; that it owns shares of stock in Fujitsu Philippines, Inc. (FPI), a domestic corporation engaged in the sale or service of computer; that the total number of shares held by Fujitsu Limited in FPI is 2,262,796 with a par value of P10.00 per share or a total of P22,627,960.00 which constitutes 40% of the entire shareholdings of FPI; that the acquisition cost of the said shares is P7,575,685; that Fujitsu Limited proposes to sell or transfer the aforesaid shares of stock to Fujitsu Asia, a company which will be organized in Singapore to service the regional office of all its affiliates in Asia; that the transfer may be made either through a direct sale or by way of exchange of shares of stock; that Fujitsu Limited proposes to subscribed to shares of stock of Fujitsu Asia and in payment for said subscription, the company will transfer to Fujitsu Asia its shares of stock held in FPI; that the transfer will be made at book value which will be higher than the acquisition cost of the shares; that it is your understanding that any gain realized from the above sale or exchange is not subject to tax in the Philippines by virtue of the Tax Treaty between the Philippines and Japan; that Article 13 paragraph 5 of said treaty provides, viz: "Article 13 "(4) . . . "(5) Gains from the alienation of any property other than these referred to in paragraphs (1), (2), (3) and (4) shall be taxable only in the Contracting State of which the alienator is a resident." cdta that said paragraphs (1), (2), (3) and (4) specifically enumerates the gains realized from the sale or transfer of shares of stock of a Philippine company whose assets do not consists principally of immovable properties situated in the Philippines; that in interpreting the above provisions which are found in almost all the tax treaties entered by the Philippines with different countries, this Office on various occasions ruled that gains realized from the transfer or disposition of shares of stock held by a non-resident in a Philippine company is not subject to Philippine tax, provided that the assets of said Philippine company do not principally consists of immovable properties situated in the Philippines; that said gains will only be taxed in the country where the seller is domiciled; that considering that the assets of FPI do not consist principally of real or immovable properties situated in the Philippines, you are of the opinion that the gains that may be realized from the proposed sale of shares of stock held therein by Fujitsu Limited will not be subject to any Philippine tax; that likewise, the above sale will not be subject to documentary stamp tax since the sale will be executed outside the Philippines; and that being an excise tax, it is applicable only to transactions effected and consummated within the Philippines. In reply, please be informed that Article 13, paragraphs 4 and 5 of the RP-Japan Tax Treaty stipulates that "(4) Gains from the alienation of shares of a company, or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State." (emphasis supplied). "(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." cdtech In relation to the above-quoted treaty provision, Revenue Regulations No. 4-86 provides as follows: "SEC. 1. Objective . Under Philippine tax treaties, capital gains derived by residents of the other Contracting States from the disposition of a share or of an interest in a Philippine Corporation are taxable in the Philippines only if the assets of such corporation consist principally of real property interest located in the Philippines . . . . (emphasis supplied). "SEC. 2. Definitions . for purposes of these Regulations, the following terms and phrases shall be understood to mean a) "Real Property Interest" interests on properties enumerated in Section 3 which are not, however, exclusive of others that are similarly situated. As used in the treaties and in these Regulations, it shall be understood to include real properties as understood under Philippine laws; b) "Principally", "wholly or principally", "directly principally" or "attributable" more than fifty percent of the entire assets in terms of value ; (emphasis supplied) xxx xxx xxx On the basis of all the foregoing, it is the opinion of this Office as it hereby holds that the sale by Fujitsu Limited to Fujitsu Asia of the shares of stock issued by Fujitsu Philippines, Inc. to the former is not subject to capital gains tax. The value of the real property interests of Fujitsu Limited that are located in the Philippines does not exceed fifty percent of its total assets. Such being the case, any capital gains which Fujitsu Limited might derive from the disposition of its shares in FPI are not subject to Philippine tax. (BIR Ruling No. 195-90 dated September 18, 1991) LLpr Very truly yours, ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)