BIR Ruling [DA-348-99]

June 15, 1999 BIR RULING [DA-348-99] Atty. Juanito C. Castaeda, Jr. BAGA & Associates Suite 1704, Herrera Tower 98 Herrera corner Valero Salcedo Village Makati City S i r : This refers to your letter dated October 9, 1998 requesting on behalf of your client, CMG Asia Pty. Limited, for a ruling that the sale of its shares of stock in CMG Life Insurance Company, Inc. (CMG Life) is exempt from the payment of capital gains tax pursuant to Article 13(3) of the RP-Australia Tax Treaty. It is represented that CMG Asia Pty. Limited is a non-resident foreign corporation organized and existing under the laws of Australia; that it has no permanent establishment in the Philippines and is not engaged in trade or business therein; that it owns stock in CMG Life, a domestic corporation organized and existing under the laws of the Philippines, whose assets do not consist principally of real property or of rights to exploit, or to explore for, natural resources in the Philippines; that at present, CMG Life has as its registered stockholders: CMG Asia (Philippines) Holdings, Limited formerly known as JLA Holdings Limited, a non-resident foreign corporation organized and existing under the laws of Bermuda, CMG Asia Pty. Limited, and five (5) individual stockholders and directors of CMG Life, holding one (1) share each in CMG Life in trust for CMG Asia Pty. Limited; that CMG Asia (Philippines) Holdings Limited will sell all its shares in CMG Life to CMG Asia Pty. Limited, to which all appropriate taxes will be paid on the sale; that after the sale of said shares, CMG Asia Pty. Limited will become the sole beneficial owner of all the shares in CMG Life; that CMG Asia Pty. Limited will be the registered owner of all but five (5) shares in CMG Life, which shares will remain registered in the name of the five (5) stockholders/directors, who are trustees of CMG Asia Pty. Limited; that subsequently, pursuant to a corporate group restructuring, CMG Asia Pty. Limited will sell all its shares in CMG Life to its wholly-owned subsidiary, CMG Asia Life Holdings Limited, a non-resident foreign corporation organized and existing under the laws of Bermuda, for valuable consideration; that as of December 31, 1997 per latest audited financial statements of CMG Life, its real property amounts only to P14,646,859.00 out of the total assets of P 1,901,291,136.00 or only 0.77% of its total assets; and that none of the assets pertain to rights to exploit, or to explore for, natural resources. In reply, please be informed that Article , 13 of the RP-Australia Tax Treaty reads "ARTICLE 13 "Alienation of Property "(1) Income from the alienation of real property may be taxed in the Contracting State in which that property is situated. "(2) For the purposes of this Article (a) the term "real property" shall have the meaning which it has under the laws in force in the Contracting State in which the property in question is situated and shall include (i) a lease of land or any other direct interest in or over land; (ii) rights to exploit, or to explore for, natural resources; and (iii) shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting States or of rights to exploit, or to explore for, natural resources in one of the Contracting States; (b) real property shall be deemed to be situated (i) where it consists of direct interests in or over land-in the Contracting State in which the land is situated; (ii) where it consists of rights to exploit, or to explore for, natural resources in the Contracting State in which the natural resources are situated or the exploration may take place; and (iii) where it consists of shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting States or of rights to exploit, or to explore for, natural resources in one of the Contracting States in the Contracting State in which the assets or the principal assets of the company are situated. "(3) Subject to the provisions of paragraph (1), income from the alienation of capital assets of an enterprise of one of the Contracting States or available to a resident of one of the Contracting States for the purpose of performing professional services or other independent activities shall be taxable only in that Contracting State, but, where those assets form part of the business property of a permanent establishment or fixed base situated in the other Contracting State, such income may be taxed in that other State." Such being the case, since the sale by CMG Asia Pty. Limited, a non-resident foreign corporation organized under the laws of Australia, of its shares of stock in CMG Life, a domestic corporation to its wholly-owned subsidiary, CMG Asia Life Holdings, Limited, a non-resident foreign corporation organized under the laws of Bermuda, are not shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting States or rights to exploit, or to explore for, natural resources in one of the Contracting States, but rather income from the alienation of its capital assets as provided for under paragraph (3) of Article 13 of the RP-Australia Tax Treaty, the gains derived therefrom by CMG Asia Pty. Limited are taxable only in Australia. (BIR Ruling No. 089-97 dated August 5, 1997) Accordingly, upon presentment of proof that the documentary stamp tax on the transfer has been paid, the Corporate Secretary of CMG Life may cause the registration of the transfer of the shares of stock from CMG Asia Pty. Limited to CMG Asia Life Holdings Limited in the Stock and Transfer Book of the corporation and cancel and issue new Stock Certificates in the name of CMG Asia Life Holdings Limited. 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, Commissioner of Internal Revenue By: (SGD.) SIXTO ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)