BIR Ruling [DA-531-98]

November 27, 1998 BIR RULING [DA-531-98] Angara Abello Concepcion Regala & Cruz ACCRA Building, 122 Gamboa Street Legaspi Village Makati City Attention: Attys . Ruby Rose J . Yusi and Allan Paul L . Matute Gentlemen : This refers to your letter dated July 24, 1998 requesting on behalf of your clients, JAIC P-1B Investment Fund, JAIC P-2(A) Investment Fund and JAIC P-2(B) Investment Fund (collectively referred to as the Sellers) for a ruling that the sale of their respective shareholdings in Soft Ware Ventures International Corporation (SVIC) is exempt from capital gains tax pursuant to Article 13 of the RP-Japan Tax Treaty. It is represented that each of the Sellers is a partnership established and existing under the laws of Japan; that they collectively own 2,751,600 shares of stock in SVIC representing approximately 10% of the outstanding capital stock of SVIC; that they are not engaged in trade or business in the Philippines; that pursuant to their respective corporate plans of divesting all their interests in SVIC, the Sellers now propose to sell their respective shares in SVIC to the following: casia Seller No. of Shares Buyer JAIC P-1B Investment Fund 61,048 Info Tech Ventures, Inc. '" 68,115 Sino French Investment Co. '" 191,547 O. W & W Investments Ltd. '" 102,173 Nikko Pacven Walden Investments '" 556,277 Pacven Walden Ventures III., L.P. '" 305,040 Walden AB Ayala Ventures Co., Inc. JAIC P-2(B) Investment Fund 317,817 Pacven Walden Ventures III., L.P. '" 174,278 Walden AB Ayala Ventures Co., Inc. '" 34,878 Info Tech Ventures Ltd. '" 38,916 Sino French Investment Co. '" 109,437 O. W & W Investments Ltd. '" 58,374 Nikko Pacven Walden Investments JAIC P-2(A) Investment Fund 34,878 Info Tech Ventures Ltd. '" 38,916 Sino French Investment Co. '" 174,278 Walden AB Ayala Ventures Co., Inc. '" 109,437 O. W & W Investments Ltd. '" 317,817 Pacven Walden Ventures III., L.P. '" 58,374 Nikko Pacven Walden Investments and that as of December 31, 1997, the assets of SVIC do not consist principally of immovable property as the real property interest of SVIC amounts to P92,055,234.00 comprising only 16.43% of the total assets of P560,260,757.00. 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 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 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. the gains which will be realized by the Sellers from the sale of their shares of stock in SVIC, a domestic corporation, to their respective buyers 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 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, SVIC's real property interest is less than 50% of its entire assets. Accordingly, the gains if any to be realized by the Sellers from the sale of their shares of stock in SVIC to their respective buyers are not subject to Philippine income tax but subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. (BIR Ruling No. 007-96 dated January 18, 1996) asiadc 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 S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)