Gain Derived from Redemption of Units in a Mutual Fund Excluded from Gross Income

August 16, 2005 BIR RULING NO. 014-05 32 (B) (h) 000-00 Sycip Salazar Hernandez & Gatmaitan 9th Floor, SyCip Law-All Asia Capital Center 105 Paseo de Roxas, Makati City Attention: Atty. Euney Marie J. Mata-Perez Gentlemen : This refers to your letter dated February 17, 2000 requesting for confirmation of your opinion that any gain on the redemption of units in a mutual fund established under the laws of France is exempt from capital gains tax pursuant to Section 32 (B) (7) (h) of the Tax Code of 1997. It is represented that Vivendi Growth Fund (Fund) is an open-end mutual fund established under the laws of France in which investors pool their investments; that the Fund is intended solely for the employees of the Vivendi group and its purpose is to take and invest the savings of these employees; that it was created to implement the group savings plan of the employees of the Vivendi group's non-French affiliates; that the Vivendi group comprise approximately 700 related companies established in 40 countries of the world; that it has 6 affiliates in the Philippines with approximately 360 employees; that units of the Fund are being offered for sale to the employees of the Philippine affiliates; that the employees participating in the Fund are required to hold their units for five years from the date of purchase, but may be entitled to redeem their units prior to such time upon the occurrence of various events, including, marriage or death of the participant, or termination of the participant's employment contract; that after the five-year holding period, units are redeemable at any time; that the participants' investment in the Fund will be guaranteed by their local employing company, i.e. , the Philippine affiliates, so that they will be entitled to receive on 20 June 2005 or prior to that date (upon early redemption of all of their units) a minimum guaranteed amount equal to the value of the participant's initial investment (in Euro) plus the higher of the following percentages: (i) six times the performance of the Vivendi share price during the period of participants' investment and (ii) a 5% annual interest yield capitalized over the period of their investment ( i.e. , 27.6% of participant's investment is five years); that the actual payment by the local employing company under the guarantee will be equal to the positive difference, if any, between the minimum guaranteed amount and the redemption value of their units on 20 June 2005 (or on the date of early redemption); and that no payment will be made under the guarantee if the value of the participants' units equals or exceeds the minimum guaranteed amount, although they would then be entitled to the redemption value of these units should they decide to redeem them. In reply, please be informed that your opinion that any gain on the redemption of units in the Fund is exempt from capital gains tax is hereby confirmed. SAaTHc Under Section 32 (B) (7) (h) of the Tax Code, gains realized by the investor upon redemption of shares of stock in a mutual fund is excluded from gross income for income tax purposes, to wit: "(h) Gains from the Redemption of Shares in Mutual Fund . Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22(BB) of this Code." Section 22 (BB) of the Tax Code defines the term "mutual fund company" to mean an open-end and close-end investment company as defined under the Investment Company Act. Under Section 5 (1) of R.A. 2969, otherwise known as the Investment Company Act, an open-end investment company is defined as follows: "'Open-end company' means an investment company which is offering for sale or has outstanding any redeemable security of which it is the issuer." The Fund is an open-end mutual fund, offering units thereof, as securities, which are redeemable. A unit in the Fund, represents a participant's rights therein, and each unit corresponds to the same percentage of the Fund's assets and may be divided into tenths, hundredths, thousandths, etc. (The Fund's Management Regulations, Title III, Article 9). Units may be redeemed within the deadline provided in the Vivendi Group Plan, or before such deadline in the cases provided by law ( Id at Article 13). Thus, the Fund is an open-end investment company as defined under the Investment Company Act. Under Section 4 of the Investment Company Act, an investment company is incorporated for the primary purpose of investing, reinvesting, or trading in securities. Thus, an investor in an investing company or a mutual fund has two inducements to invest therein: (a) he may expect more expert management of his savings than he could otherwise command; and (b) he can obtain diversification of investment not otherwise available ( Aldred Invest. Trust v. Securities and Exchange Com . 151 F2d 254, cert. Denied 362 US 795, 90 L Ed 483, 66 S Ct 486). In this regard, it is important to note that Section 32(B)(7)(h) of the Tax Code of 1997 was introduced to "encourage savings and develop our capital markets" (Sponsorship Speech of the Rep. Javier, Records of the House of Representatives, 10th Congress, 17 March 1997). Exempting any gain on the redemption of units in a mutual fund such as the Fund would be consistent with and would achieve, this avowed objective. CScTED Thus, any gain derived by employees of the Vivendi group from the redemption of units of the Fund is excluded from gross income for income tax purposes under the aforequoted provisions of the Investment Company Act and the Tax Code. This ruling is being issued on the basis of your representation. However, if upon investigation the facts are different from those represented, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue