BIR Ruling [DA-213-96]

June 25, 1996 BIR RULING [DA-213-96] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . E . C . Alcantara Tax Division Gentlemen : This refers to your letter dated April 16, 1996 requesting on behalf of your client, Far East Levingston Shipbuilding, Ltd. (FELS), for a confirmation of your opinion that FELS' gain from the sale of shares in Fels Energy, Inc. (FEI) in favor of Fels Energy Holdings, Inc. (FEHI) is exempt from Philippine tax pursuant to Article 13 (4) of the RP-Singapore Tax Treaty. It is represented that FELS is a corporation duly organized and existing under the laws of the Republic of Singapore with office address at 31 Shipyard Road, Jurong Town, Singapore 2262; that FEI is a corporation duly organized and existing under the laws of the Philippines and primarily engaged in the operation of 3x30 Mw power barges situated at Calaca, Batangas, Philippines; that FELS owns 591,500,000 common shares in FEI with a par value of P1.00 per share or a total par value of P591,500,000.00 which were subscribed at its total par value; that FELS will sell the 591,500,000 shares in FEI to FEHI, a domestic corporation; that FEI's assets do not consist principally of immovable properties situated in the Philippines as defined by Revenue Regulations No. 4-86. In reply, please be informed that Article 13 of the RP-Singapore Tax Treaty provides, viz: "Article 13 GAINS FROM THE ALIENATION OF PROPERTY "1. Gains from the alienation of immovable property may be taxed in the Contracting State in which such property is situated. "2. Gains from the alienation of movable 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 movable property pertaining to a fixed based available to a resident of a Contracting State in the other Contracting State for the purpose of performing professional services, including such gains from the alienation of such permanent establishment (alone or together with the whole enterprise) or of such a fixed base may be taxed in the other State. However, gains derived by an enterprise of a Contracting State from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships or aircraft, shall be taxable only in that State. "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. Gains from the alienation of any property, other than those mentioned in paragraph 1, 2, and 3, shall be taxable only in the Contracting State of which the alienator is a resident." The foregoing transaction involving alienation of shares of stock in a domestic corporation does not fall under paragraphs 1 and 2 abovequoted. Neither does it fall under paragraph 3 because it has been ascertained from the latest financial statement of the FEI, that its property does not consist principally, which means less than 50%, of real property located in the Philippines. Such being the case, the foregoing transaction falls under paragraph 4. aisadc Accordingly, the gains derived by Far East Levingston Shipbuilding, Ltd., a resident corporation of Singapore from the sale of its 591,500,000 shares of stock in Fels Energy, Inc., are not subject to the capital gains tax pursuant to Article 13 (4) of the RP-Singapore Tax Treaty and under Section 25 (b) in relation to Section 25 (b) (C) (i) and 36 (c) of the Tax Code, as amended, but is subject to tax only in Singapore. (BIR Ruling No. 67-90 dated April 30, 1990; BIR Ruling No. 100-94 dated April 28, 1994). Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)