BIR Ruling [DA-194-99]

March 29, 1999 BIR RULING [DA-194-99] Roxas Delos Reyes Laurel & Rosario Law Offices 19/F PDCP Bank Building, 8737 Paseo de Roxas, Makati City 1200 Attention: Attys . Anna Melissa L . Rosario & Joycel G . Robles-Panlilio Gentlemen : This refers to your letter dated February 11, 1999 requesting on behalf of your clients, Messrs. Teng Woei E'n and Teh Yong Khoon, Malaysian Citizens, for relief from the payment of capital gains tax due upon the alienation of their shares of stock in Engtek Philippines, Inc. (EPI), pursuant to Article 13(3) of the RP-Malaysian Tax Treaty. It is represented Engtek Philippines, Inc. is a domestic corporation wholly owned by foreign nationals; that it does not own any real property in the Philippines; that its assets consist principally of inventory; that fixed assets in the form of plant, building improvement and equipment compose approximately a mere seventeen percent (17%) of the corporation's assets; that its major shareholder is Eng Teknologi Holdings Bhd., a non-resident foreign corporation duly organized and existing under and by virtue of the laws of Malaysia (ETHB) and listed on the Secondary Board of Kuala Lumpur Stock Exchange; that ETHB has appointed, among others, Mr. Teng as director and vice-president of the corporation to oversee the corporation's operation in the Philippines; that as such, Mr. Teng Woei E'n is the registered and beneficial owner of 1,249,999 common shares of stock of the corporation and maintain residence both in the Philippines and in Penang, Malaysia; that on the other hand, Mr. Teh Yong Khoon is the registered and beneficial owner of 2,499,999 common shares of stock of the corporation and likewise maintains residence in Penang, Malaysia; that ETHB now desires to upgrade its listing to the Main Board of the Kuala Lumpur Stock Exchange pursuant to the same and in order to qualify therefore, ETHB has offered to acquire the remaining 15% of the outstanding capital stock of the corporation, including Messrs. Teng and Teh's shareholdings therein; that hence, the execution of a Sale and Purchase Agreement between ETHB and the holders of the remaining 15% equity in the corporation. In reply, please be informed that the pertinent portion of Article 13(3) of the RP-Malaysia Tax Treaty provides, viz: "ARTICLE 13 "Gains from the Alienation of Property "(1) . . . "(2) . . . "(3) Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Gains from the alienation of an interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. "(4) . . ." From the above-quoted provisions of Article 13(3) of the RP-Malaysia Tax Treaty, it is clear that the transfer of Mr. Teng and Mr. Teh's shares in EPI whose property does not consist principally of immovable property situated in the Philippines to ETHB is taxable only in Malaysia. Hence, the gains from such alienation of shares of stock in EPI by your clients, Mr. Teng and Mr. Teh to ETHB is not subject to Philippine income tax and consequently to the Philippine withholding tax pursuant to Article 13(3) of the RP-Malaysia Tax Treaty. (BIR Ruling No. 394-95 dated November 10, 1995) 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)