BIR Ruling [DA-273-97]

August 14, 1997 BIR RULING [DA-273-97] Castillo Laman Tan Pantaleon & San Jose The Valero Tower, 122 Valero Street, Salcedo Village Makati City Attention: Attys. Mel A. Macaraig and Joseph Gregson A. Castillo Gentlemen: This refers to your letter dated August 13, 1996 requesting, for a ruling that any capital gain from the sale by your client, Gtech Corporation (Gtech), a corporation organized and existing under the laws of Delaware, USA, of its stockholdings in Pacific Online Systems Corporation (Pacific), a corporation organized and existing under Philippine laws, to Subco Technology, Inc. (Subco), a newly formed Philippine corporation, is not subject to capital gains tax under the RP-US Tax Treaty. It is represented that Gtech plans to sell its 25,050,000 common shares in Pacific to Subco; that as shown by the latest Financial Statements of Pacific, a copy of which has been submitted to this Office, its real property interest does not exceed 50% of its total assets; and that the only property assets of the company are certain leasehold improvements amounting to P16,162,639.09 out of the total assets of P172,584,268.07, or translated into a mere 9.36% of its total assets. In reply, please be informed that any gain which may be realized by Gtech from the sale of its shares of stock in Pacific to Subco shall be taxable only in the United States pursuant to Article 14 (2) of the RP-US Tax Treaty. Hence, said gain is not subject to Philippine tax. HAECID The Reservation Clause of the RP-US Tax Treaty, pertinent portion of which is quoted hereunder as follows: "Article I "Notwithstanding the provisions of Article 14 of the Convention relating to capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of real property interest located in that country. Likewise, both countries may tax gains from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term "real property interest" is to have the meaning it has under the law of the country in which the underlying real property is located." does not apply in this case. It is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consist principally of real property interest located in the Philippines. The term "principally" means more than 50% of the entire assets in terms of value. (Sec. 2, Revenue Regulations No. 4-86) In the instant case, Pacific Online Systems Corporation's financial statements as of August 31, 1996 show that its real property or fixed assets is less than 50% of the value of its total assets. (BIR Ruling No. 42-87 dated February 10, 1987) Such being the case, the capital gains to be derived by GTECH from the sale of its shares of stock in Pacific to Subco shall not be subject to Philippine income tax and will be taxable only in the United States, where the alienator is a resident pursuant to Article 14 (2) of the RP-US Tax Treaty. 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. EAICTS Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV OIC-Assistant Commissioner (Legal Service)