BIR Ruling [DA-295-96]

July 30, 1996 BIR RULING [DA-295-96] Angara Abello Concepcion Regala & Cruz Law Offices ACCRA Building, 122 Gamboa St., Legaspi Village Makati City Attention: Atty. Tadeo F. Hilado and Atty. Ruby Rose J. Yusi Gentlemen : This refers to your letter dated November 24, 1995 requesting confirmation of your opinion that any capital gains from the sale by your client, Sumiden Denyo Co., Ltd. (SUMIDEN) of its shares of stock in Sumisetsu Philippines, Inc. (SPI) to Sumitomo Densetsu Co., Ltd. is not subject to capital gains tax under the RP-Japan Tax Treaty. It is represented that Sumiden is a corporation duly organized and existing under the laws of Japan; that Sumiden owns 712 shares of stock of SPI, a domestic corporation; that Sumiden does not engage in any business activities in the Philippines; that on November 30, 1995, Sumiden sold its 712 shares of stock in SPI to Sumitomo, another Japanese corporation; and that as shown by the latest financial statement of SPI, its real property interest does not exceed 50% of its total assets, comprising only 6.80% of the total assets value of P66,309,939.00. In reply, please be informed that your opinion is hereby confirmed. Gains which may be realized by Sumiden from the sale of its shares of stock in SPI to Sumitomo shall be taxable only in Japan pursuant to Article 13 (5) of the RP-Japan Tax Treaty, which provides, viz: "Article 13 "(1) Gains derived by a resident of a Contracting State from the alienation of immovable property as defined in paragraph (2) of Article 6 and situated in the other Contracting State may be taxed in that other Contracting State. "(2) Gains from the alienation of any property, other than immovable 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 any property, other than immovable property, pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal 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 that other Contracting State. "(3) Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic and any property, other than immovable property, pertaining to the operation of such ships or aircraft shall be taxable only in that Contracting State. "(4) Gains from the alienation of shares of company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State. "(5) Gains from the alienation of any property other than those referred to in paragraphs (1), (2), (3) and (4) shall be taxable only in the Contracting State of which the alienator is a resident. The above transaction involving sale of shares of stock of SPI, a domestic corporation does not fall under paragraphs 1, 2 & 3 above quoted. Neither does it fall under paragraph 4 because it has been ascertained from the current financial statement of SPI that the total market value of its real properties is only 6.80% of its total assets, hence, do not consist principally of real property located in the Philippines. Such being the case, the transaction falls within the purview of paragraph 5. Accordingly, the gains if any derived by Sumiden from the sale of its shares to Sumitomo is subject to tax only in Japan, the country where the seller is a resident. Said gains, therefore, are not taxable in the Philippines. (BIR Ruling No. 071-90 dated May 10, 1990) Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: (SGD.) ALICIA L. TOMACRUZ Head Rev. Executive Assistant (Legal)