BIR Ruling [DA-319-97]

September 17, 1997 BIR RULING [DA-319-97] Punongbayan & Araullo 6th Floor, Vernida IV Bldg. Alfaro St., Salcedo Village Makati City Attention: Atty. Vic C. Mamalateo Tax Partner Gentlemen : This refers to your letter dated December 13, 1996 requesting for a ruling that the sale of shares of stock by KAWAJU MARINE ENGINEERING CO. LTD. (KMEJ) in KAWAJU MARINE ENGINEERING PHILS., INC. (KMEP), is exempt from capital gains tax. It is represented that KMEJ is a non-resident foreign corporation organized under the laws of Japan while KMEP is a corporation duly organized and existing in accordance with Philippine laws; that KMEP is the local representative of KMEJ in the Philippines; that KMEJ is the owner of 35,000 shares of stock in KMEP; that by virtue of a Deed of Sale executed on December 16, 1996, KMEJ, represented by its President, Minoru Fujita, transferred the subject shares in favor of KAWASAKI HEAVY INDUSTRIES, LTD. for and in consideration of P3,500,000.00; and that KMEP has no real property holdings in the Philippines. In reply, please be informed that Article 13 of the RP-JAPAN Tax Treaty provides as follows: IHaECA "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 based, 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 a 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 ." (Emphasis supplied) the gains which will be realized by KMEJ from the sale of its shares of stock in KMEP shall be taxable only in Japan. However, under the aforequoted provision of paragraph 4, supra , which is similar to the Reservation Clause of the RP-US Tax Treaty, the Philippines may tax the gains derived from the disposition of interest in a corporation if its assets consist principally of real property interest located in the Philippines. "Real property interest" means interest on properties enumerated in Section 3 of Revenue Regulations No. 4-86 which are not, however, exclusive of others that are similarly situated. As used in the treaties and in the Regulations, it shall be understood to include real properties as contemplated under Philippine laws. Moreover, "principally" means more than 50% of the entire assets in terms of value. (Sec. 2 (a) and (b), Revenue Regulations No. 4-86) As the Financial Statements would show, KMEP has no real property holdings in the Philippines. Accordingly, the gains if any to be realized by KMEJ from the sale of its shares in KMEP to Kawasaki Heavy Industries, Ltd. is subject to tax only in Japan, the country where the seller is a resident. Hence, such gain is not taxable in the Philippines. (BIR Ruling Nos. 71-90 dated May 10, 1990; DA-295-96 dated July 30, 1996). DHTECc 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)