BIR Ruling [DA-123-97]

March 21, 1997 BIR RULING [DA-123-97] Herrera Teehankee & Faylona Law Offices 5/F SGV II Building 6758 Ayala Avenue Makati City Attention: Atty . Marissa T . Academia and Atty . Mary Rogelyn T . Cabrera Gentlemen : This refers to your letter dated November 12, 1996 requesting confirmation of your opinion to the effect that the transfer by Ericsson Network Engineering AB (ENS) of its shares in Philnet Ericsson, Inc. (Philnet) to Telefonaktiebolaget LM Ericsson (LME) is not subject to capital gains tax. It is represented that Philnet is a domestic corporation with an authorized capital of One Hundred Million Pesos (P100,000,000.00) divided into One Million (1,000,000) shares with a par value of One Hundred Pesos (P100.00) per share; that on September 9, 1996, Philnet filed its application for an increase in capital from One Hundred Million Pesos (P100,000,000.00) to Two Hundred Million Pesos (P200,000,000.00) with the Securities and Exchange Commission (SEC); that out of the subscribed capital of One Hundred Five Million Pesos (P105,000,000.00), ENS subscribed to Four Hundred Twenty Thousand (420,000) shares with a total par value of Forty Two Million Pesos (P42,000,000.00); that the aforesaid application for increase in capital is still pending with the SEC; that ENS is a corporate entity registered and existing under and by virtue of the laws of Sweden; that it is wholly owned by LME, a corporation also registered under Swedish laws; that due to a corporate reorganization of LME and a re-alignment of its investments, ENS will be dissolved; that its shares in Philnet will be transferred to its sole shareholder, LME; and that the said transfer of shares is effected in view of the dissolution of ENS. In reply, please be informed that on the basis of the facts as herein represented, no sale of stocks took place between LME and its wholly-owned subsidiary ENS involving Philnet shares of stock. Consequently, no gain was realized by LME for income tax purposes. Moreover, assuming that gain was realized, the same is exempt from capital gains tax imposed by Section 24(e) (2) of the Tax Code in accordance with Article 13(4) of the RP-Sweden Tax Treaty which provides: "(4) Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2 and 3 shall be taxable only in the Contracting State in which the alienator is a resident." Under the foregoing provisions of the Tax Treaty, the gains derived, if any, from the transfer of the Philnet shares by ENS to LME shall be taxable in Sweden. (BIR Ruling Nos. 112-84 dated June 21, 1984 and 295-88 dated July 5, 1988) 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, then this ruling shall be considered null and void. LLjur Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)