BIR Ruling [DA-274-97]

August 14, 1997 BIR RULING [DA-274-97] 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 Subco Technology, Inc. (SUBCO), a newly formed Philippine corporation, to Belle Corporation (Belle), a domestic corporation, is not subject to capital gains tax under the RP-US Tax Treaty. It is represented that GTECH does not have any permanent establishment in the Philippines; that it owns 5,500,000 common shares in SUBCO with a par value of P1.00 per share; that SUBCO does not own any real property within the Philippines; that GTECH intends to sell its said shareholdings in two separate sales (covering 2,750,000 shares in each sale) to Belle; and that in support of your request, you have submitted the following documents, viz. : (1) Two sets of BIR Form No. TC-001 in triplicate (one for each sale); (2) Duly authenticated copy of the Certificate of the Secretary of State of Delaware, USA, attesting to the fact of the seller's incorporation and residence in the United States; (3) Copy of the Articles of Incorporation of SUBCO indicating the subscription of GTECH to the shares of SUBCO at par value; (4) copy of the Deed of Assignment to be executed by GTECH as evidence of the first sale; (5) copy of the Deed of Assignment to be executed by GTECH as evidence of the second sale; and (6) Corporate Secretary's Certificate showing the numbers and value of the shares of GTECH and the latter's percentage of ownership in SUBCO. HaTDAE In reply, please be informed that any gain which may be realized by GTECH from the sale of its shares of stock in SUBCO to BELLE 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. 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 gains derived from the disposition of interests in a corporation if its assets consist principally of real property 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, considering that SUBCO does not own any real property, within the Philippines, the capital gains to be derived by GTECH from the sale of its shares of stock in SUBCO to Belle shall be taxable only in the United States, where the alienator is a resident. (BIR Ruling No. 42-87 dated February 10, 1987) HCITAS 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, (SGD.) SIXTO S. ESQUIVIAS IV OIC-Assistant Commissioner (Legal Service)