Gains, if any, to be Realized by Mitsubishi Estate Co., Ltd. from the Sale of its Class "B" Shares of Stock in Ayala Corporation to Prospective Buyers, Who are also Japanese Companies Not Subject to Philippine Income Tax but Subject to Documentary Stamp Tax

January 18, 1996 BIR RULING NO. 007-96 28 (b) (6) 000-00 007-96 Angara Abello Concepcion Regala & Cruz ACCRA Bldg., 122 Gamboa Street Legaspi Village, Makati City Attention: Attys . Victor P . Lazatin and Senen Y . Glinooa Gentlemen : This refers to your letter dated December 1, 1995 requesting for a ruling as to whether the gains, if any, arising from the sale by Mitsubishi Estate Co., Ltd. of its shares of stock in Ayala Corporation are exempt from Philippine tax pursuant to the RP-Japan Tax Treaty. LLjur It is represented that Mitsubishi estate Co., Ltd. (Mitsubishi), a company organized under the laws of Japan owns Class "B" shares of stock of Ayala Corporation, a publicly listed domestic company; that Mitsubishi is currently negotiating with prospective buyers, which are also Japanese companies for the sale of its shares of stock in Ayala Corporation; that Ayala Corporation: is a holding company which has equity investments in various companies engaged in different lines of businesses one of which is Ayala Land, Inc. (ALI) which is principally engaged in real estate development; that ALI is also a publicly listed company whose ownership is widely dispersed; that as a holding company, Ayala Corporation's real property interest is less than 50% of its entire assets as shown by its latest (1994) audited financial statements; and that the sale will be affected outside the Philippine Stock Exchange. In reply, please be informed that pursuant to Article 13 of the RP and 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 in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such 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 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 the alienation of any property other than 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 Mitsubishi from its sale of shares of stock in Ayala Corporation, a domestic corporation, to Japanese companies 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 other that are similarly situated. As used in the treaties and in the Regulations, it shall be understood to include real properties as understood under Philippines 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, Ayala Corporation's real property interest is less than 50% of its entire assets. Moreover, on the issue of whether the real property interest of Ayala Land, Inc. (ALI) is not attributable to its mother company, Ayala Corporation, this Office in BIR Ruling No. 202-89 dated September 19, 1989 held that "Real property interest in Ayala Land, Inc. cannot be attributed to Ayala Corporation since the stock investment of a corporation in its subsidiary which is engaged in the realty business is not included in the enumeration of real property interest and/or real properties enumerated in Section 3 of the aforesaid regulations. The aforementioned transaction is still exempt from capital gains tax even if the said real property interest of Ayala Land, Inc. exceeds 50% of its total asset base. The real property interest of Ayala Land, Inc, is not attributable of its mother company, Ayala Corporation." Accordingly, the gains if any to be realized by Mitsubishi Estate Co., Ltd. from the sale of its Class "B" shares of stock in Ayala Corporation to prospective buyers, who are also Japanese companies are not subject to Philippine income tax but subject to the documentary stamp tax imposed under Section 176 of the Tax Code, as amended by Republic Act No. 7660. 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. prll Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue