BIR Ruling [DA-213-97]

May 29, 1997 BIR RULING [DA-213-97] Belo, Gozon, Elma, Parel Asuncion & Lucila 15/F Sagittarius Condominium, H.V. dela Costa St., Salcedo Village Makati City Attention: Atty . Catherina M . Fernandez Gentlemen : This refers to your letter dated March 10, 1997 requesting for a ruling that the sale of 319,996 Class "B" shares of stock of Express Telecommunication Co., Inc. (Extelcom) as well as the assignment of subscription to P5,599,930 worth of shares of stock Extelcom, by Millicom International Holdings Ltd. (MIHL) in favor of Millicom Holdings B.V. (MHBV) is not subject to Philippine income tax. It is represented that Extelcom is a domestic corporation duly registered with the Securities and Exchange Commission; that MIHL is a corporation duly organized and existing under and by virtue of the laws of British Virgin Islands, with principal office and residence at Curacao, Netherlands Antilles; that MHBV is a corporation duly organized and existing under and by virtue of the laws of the Netherlands, with principal office at Rotterdam, Netherlands; that MIHL is the absolute and registered owner of 319,996 class "B" shares of stock of Extelcom and has subscribed to P5,599,930 worth of shares in the increase in the authorized capital stock of Extelcom; that MIHL is considering selling its Extelcom shares and its subscription rights to MHBV for a total consideration of USD$671,555.38. In reply, please be informed that Article 13 of the RP-Netherlands Tax Treaty provides as follows: cd "Article 13 GAINS FROM THE ALIENATION OF PROPERTY "1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the 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 one of the States has in the other State, or of movable property pertaining to a fixed based available to a resident of one of the States in the other State for the purpose of performing professional 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 the other State. "3. Notwithstanding the provisions of paragraph 2, gains derived by an enterprise of one of the 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. "4. Gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3, shall be taxable only in the State of which the alienator is a resident . "5. The provisions of paragraph 4 shall not affect the right of each of the States to levy according to its domestic law a tax on gains from the alienation of any property derived by an individual who is a resident of the other State and has been a resident of the first-mentioned State at any time during the six years immediately preceding the alienation of the property." (Emphasis supplied). It is clear from the aforequoted provisions of the RP-Netherlands Tax Treaty that capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of Article 13 of the tax treaty shall be taxable only in the State where the alienator is a resident. Considering that the sale of shares of stock as well as a the assignment of subscription rights are not among those mentioned in said paragraphs 1, 2 and 3 of Article 13 of the RP-Netherlands Tax Treaty, the gains that may be derived by MIHL, which is a resident of the Netherlands, from the sale of its shares of stock and assignment of its subscription to the increase in the authorized capital stock of Extelcom, a domestic corporation, shall not be subject to the Philippine income tax under Section 25(b)(5)(C)(i) of the Tax Code, as amended, but are subject to tax only in the Netherlands. However, the sale by MIHL of its Class "B" Common shares as well as the assignment of its subscription in the increase in the authorized capital stock of Extelcom is subject to the documentary stamp tax in accordance with section 176 of the tax Code, as amended by Republic Act No. 7660. cdta This ruling is being issued on the basis of the foregoing facts as represented, However, if upon investigation, it will be discovered that the facts are different, then this ruling shall be considered null and void. (BIR Ruling 9-96 dated January 23, 1996; BIR Ruling DA-086-96 dated February 27, 1996). Very truly yours, SIXTO S. ESQUIVIAS IV OIC, Assistant Commissioner (Legal Service)