Sale by Music Semiconductor-NV of Its Shares of Stock in Music Semiconductors Corporation, a Domestic Corporation, Not Subject to Philippine Income Tax

January 23, 1996 BIR RULING NO. 009-96 Sec. 28 (b) (6) 000-00 009-96 Music Semiconductors Corporation 12/F First Bank Centre 8737 Paseo de Roxas Makati City Attention: Ms . Ma . Theresa G . Santos Gentlemen : This refers to your letter dated November 24, 1995, requesting in effect for a ruling that the sale by MUSIC Semiconductor-NV (MSNV) of its shares of stock in MUSIC Semiconductors Corporation (MSC-Phil.), a domestic corporation, is not subject to Philippine income tax. LLphil It is not represented that MSNV is a non-resident foreign corporation organized and existing under the laws of the Netherlands; that in April 1990, MSNV incorporated a U.S. subsidiary, MUSIC Semiconductors, Inc., (MSI, US), based in Colorado Springs with regional offices in California and New Jersey; that in January 1992, MSNV incorporated a Philippine subsidiary, MSC-Phils., to manage sales, marketing and production activities in Asia; that in July 1992, by virtue of a Memorandum of Agreement, the shareholders of MSNV swapped some 1,605,657 shares or 95.3% of MSNV shares for an equal number of MSC-Phils. shares; that under the same agreement, all 10,000 shares of MSI-US were swapped one-for-one with MSC-Phils. shares; that after the reorganization pursuant to the Memorandum of Agreement, MSC-Phils. became the parent company of the MUSIC Group including MSNV while MSNV still holds a number of MSC-Phils. shares of stock; that it was only in late 1992, that the full parent company responsibilities were transferred to MSC-Phils; and that presently, MSNV is considering selling a number of MSC-Phils. shares to third parties. In reply, please be informed that Article 13 of the RP-Netherlands Tax Treaty provides as follows: "Article 13 GAINS FROM THE ALIENATION OF PROPERTY "1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the State in which such property is situated. "2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of one of the States has in the other State, or of movable property pertaining to a fixed base available to a resident of one of the State in the other State for the purpose of performing professional services, including such gains from the alienation of such permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in the other State. "3. Notwithstanding the provisions of paragraph 2, gains derived by an enterprise of one of the States from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships or aircraft shall be taxable only in that State. "4. Capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3, shall be taxable only in the State of which the alienator is a resident . "5. The provisions of paragraph 4 shall not affect the right of each of the States to levy according to its domestic law a tax on gains from the alienation of any property derived by an individual who is a resident of the other State and has been a resident of the first mentioned State at any time during the six years immediately preceding the alienation of the property." (Emphasis supplied). aisadc It is clear from the aforequoted provisions of the RP-Netherlands Tax Treaty that capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of Article 13 of the tax treaty shall be taxable only in the State where the alienator is a resident. Considering that sale of shares of stock is not among those mentioned in said paragraphs 1, 2 and 3 of Article 13 of the tax treaty, the gains that may be derived by MSNV, which is a resident of Netherlands, from the sale of its shares of stock in MSC-Phils., a domestic corporation, shall not be subject to Philippine income tax under Section 25(b)(5)(C)(i) of the Tax Code, as amended, but are subject to tax only in the Netherlands. However, the sale by MSNV of its shares of stock in MSC-Phils. is subject to the documentary stamp tax in accordance with 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, then this ruling shall be considered null and void. llcd Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue