BIR Ruling [DA-374-98]

August 20, 1998 BIR RULING [DA-374-98] Topmax Philippines, Inc. Suite 2701-2705 Jollibee Plaza Emerald Avenue, Ortigas Center Pasig City Attention: Ms . Maria Nenita R . Gaite Finance Officer Gentlemen : This refers to your letter dated July 20, 1998 requesting for a ruling exempting Mr. Hyozaburo Kawamura from the payment of capital gains tax on the sale of his shares of stock in Topmax Philippines, Inc. to Canon, Inc. pursuant to Article 13 of the RP-Japan Tax Treaty. LLpr It is represented that Mr. Hyozaburo Kawamura a non-resident Japanese national owned 6,615 shares of stock of Topmax Philippines, Inc., a corporation duly organized and existing under Philippine laws; that on July 9, 1998, a Deed of Assignment was entered into by and between Mr. Hyozaburo Kawamura and Canon, Inc., a corporation duly organized and existing under the laws of Japan whereby the former transferred to the latter his 6,615 shares of stock in Topmax Philippines, Inc. for and in consideration of P14,489,300.00 to which the corresponding documentary stamp tax had been paid in the amount of P4,961.25; and that at the time of the transfer Topmax Philippines, Inc. does not own any real property in the Philippines as shown by its Audited Financial Statements as of March 31, 1998. In reply, please be informed that pursuant to Article 13 of the RP-Japan tax Treaty, stating: "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 on 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 gains which will be derived by Mr. Hyozaburo Kawamura from the sale of his shares of stock in Topmax Philippines, Inc. to Canon, Inc. 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 it assets consist principally of real property interest located in the Philippines. The term "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 understood 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 represented, since Topmax Philippines, Inc. does not own any real property within the contemplation of Revenue Regulations No. 4-86, the gains if any to be derived by Mr. Hyozaburo Kawamura from the sale of his shares of stock in Topmax Philippines, Inc. to Canon, Inc. a Japanese Corporation are not subject to capital gains tax imposed under Section 25(A)(3) of the Tax Code of 1997. However, the said transfer shall be subject to the documentary stamp tax imposed under Section 176 of the said Code. (BIR Ruling No. 007-96 dated January 18, 1996) Upon presentment of the evidence of payment of the documentary stamp tax, the Corporate Secretary of Topmax Philippines, Inc. can register the transfer of the shares of stock from Mr. Hyozaburo Kawamura to Canon, Inc. in their respective Stock and Transfer Books and cancel and issue new Stock Certificate in the name of the buyer. cdti 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 Deputy Commissioner (Legal & Enforcement Group)