BIR Ruling [DA-420-98]

September 15, 1998 BIR RULING [DA-420-98] Roxas De Los Reyes Laurel & Rosario 19/F PDCP Bank Building 8737 Paseo de Roxas Makati City Attention: Atty . Anna Melissa L . Rosario Gentlemen : This refers to your letter dated March 19, 1998 requesting for and in behalf of your client, Henkel KGaA (Henkel), for a ruling exempting Novamax Technologies Corporation (Novamax) from the payment of capital gains tax on the sale of its shares of stock in Novamax Philippines, Inc. (NPI) imposed under Section 28(B)(5)(c) of the Tax Code of 1997 and pursuant to Article 14 in relation to the Reservation Clause of the RP-US Tax Treaty. LLphil It is represented that Henkel is a non-resident foreign corporation organized and existing under the laws of the Federal Republic of Germany; that on the other hand, Novamax is a non-resident foreign corporation organized and existing under the laws of the United States of America; that Novamax owns 130,795 shares of stock of NPI, a domestic corporation duly organized and existing under the laws of the Philippines, with a par value of P100.00 per share or a total par value of P13,079,500.00; that on March 1, 1998, a Deed of Sale of Shares of Stock was entered into by and between Novamax and Henkel whereby the former transferred all of the NPI shares in favor of the latter; and that NPI has not acquired any real property nor does it own any fixed asset as certified to by its Corporate Secretary on February 27, 1998. In reply, please be informed that the gain which will be realized by Novamax from the sale of its shares of stock in NPI shall be taxable only in the United States pursuant to Article 14(2) of the RP-US Tax Treaty. Hence, said gain will not be 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 a real property interest located in that country. Likewise, both countries may tax gain 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 the gains derived from the disposition of interests in a corporation if its assets consist "principally," which means more than 50% of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of value (Sec. 2, Revenue Regulations No. 4-86). Considering that NPI has not acquired any real property nor does it own any fixed asset as certified to by the Corporate Secretary on February 27, 1998, the gain to be realized by Novamax is taxable only in the United States. However, the sale of the aforementioned shares of stock shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. Finally, upon presentment of a proof that the documentary stamp tax on the sale of shares of stock has been paid, the corporate secretary of NPI may cause the registration of the sale of the shares of stock from the Novamax to Henkel in the Stock and Transfer Book of the corporation and cancel and issue new Stock Certificates in the name of Henkel. (BIR Ruling No. 082-91 dated May 14, 1991) 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. cdta Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)