Tax on Capital Gains Derived from Sales of Shares of Tax

February 22, 1989 BIR RULING NO. 029-89 24 (c) & (c) (2) 000-00 029-89 Gentlemen : This refers to your letter dated November 10, 1988 stating that in line with the government's standing policy of privatization, you have pursued vigorous efforts in diverting your exposure in private undertakings; that your particular area of concern is your existing equity investments in a number of private development banks (PDBs); that efforts to dispose your preferred shares of stock in said financial institutions have been somewhat stymied due to the imposition of capital gains tax on stock transactions. cdtech Based on the foregoing representations, you now request in effect a ruling on the following: "1. Is DBP, being a government financial institution, exempt from the payment of said capital gains tax? "2. If the answer is in the negative, how is the tax computed if: a) DBP shares of stock are sold at acquisition cost or par value? b) DBP shares of stock are sold above acquisition cost? In reply, please be informed that, under Section 31 of DBP's charter (Republic Act No. 85, as amended) which is quoted as follows: "SEC. 31. The provision of any law to the contrary notwithstanding all income of the Bank derived from its operations and the exercise of its function shall be free from all past and future assessment whatsoever except under Section 24 of the National Internal Revenue Code. Taxes due to the National Government on income of the bank under Section 24 of the National Internal Revenue Code shall, beginning with taxes due on income for calendar year 1978, be automatically applied to the payment of the subscribed capital stock of the Government in the Bank." you are still subject to the corporate income tax imposed by Section 24 of the Tax Code. Such being the case, aside from the regular corporate income tax imposed under Section 24(a), you are subject to the tax on capital gains derived from sales of shares of tax under Section 24(e)(2) quoted as follows: "(2) Capital gains from sales of shares of stock Capital gains realized from the sale, exchange or disposition of shares of stocks in any domestic corporation shall be taxed as follows: (A) Net capital gains as defined in Section 33 (a)(2) realized during each taxable year from sale or other disposition of shares of stock not traded through a local stock exchange: Not over P100,000 10% Over P100,000 20% (B) Capital gains presumed to have been realized from the sale, exchange or disposition of shares of stock listed and traded through a local stock exchange 1/4 of 1% based on the gross selling price of the share or shares of stock." Moreover, if the DBP shares of stock are sold at acquisition cost or par value or above acquisition cost, the capital gains tax would depend on whether the DBP shares are not traded through a local stock exchange in which case, DBP will not be subject to capital gains tax under Section 24(e)(2)(A) of the Tax Code, as amended since it derived no net capital gains considering that the shares were sold at acquisition cost or par value. However, if the shares were sold above acquisition cost, then the capital gains tax shall be 10% if the net capital gains is not over P100,000 and 20% if the net capital gains is over P100,000. Furthermore, if the DBP shares are listed and traded through a local stock exchange, then the capital gains tax shall be 1/4 of 1% based on the gross selling price of the shares under Section 24(e)(2)(B) of the Tax Code, as amended. cd Very truly yours, (SGD.) JOSE U. ONG Commissioner