Request for Exemption from Payment of Capital Gains Tax on Sale of Shares of Stock

March 7, 1996 BIR RULING NO. 037-96 28 (b) (6) 000-00 037-96 Fernandez, Santos & Lopez 7/F Rico Gen. Building 112 Aguirre Street Legaspi Village Makati City Attention: E . A . Fernandez Gentlemen : This refers to your letter dated October 27, 1995 requesting for a ruling exempting your client, Anglo-Oriental Nominees SND. BHD. (ANGLO), from the payment of capital gains tax on its sale of its shares of stock in Didipio, Inc. (DIDIPIO) in favor of Arimco Mining Corporation (ARIMCO), pursuant to Article 13, paragraphs 3 and 4 of the RP-Malaysia Tax Treaty. casia It is represented that ANGLO is a corporation incorporated under the laws of Malaysia and with office address at 38 Menara, PNB 201 A, Jalan Tun Razak, Kuala Lumpur, Malaysia; that it owns TWO HUNDRED SIXTY (260) shares in DIDIPIO, A domestic corporation which was incorporated on September 5, 1994 for the primary purpose, among others, of acquiring and holding for investment of otherwise stock in other corporations or associations including those engaged in mining, with authorized capital stock of P1,000,000 divided into 1,000 shares at a par value of P1,000 per share; that ANGLO is not engaged in trade or business in the Philippines; that on September 23, 1994, DIDIPIO acquired all the 1,000 outstanding shares of stock of Aumex Philippines, Inc. (AUMEX), a company incorporated under Philippine Laws, which is a party to or has acquired minority contractual rights under a Financial and Technical Assistance Agreement (FTAA) dated June 20, 1994 with the Philippine Government for the exploration and development of mining properties located in Didipio, Nueva Vizcaya: that other than the aforementioned investment in the shares of stock in AUMEX, advances to subsidiary and cash, there are no other significant tangible assets held by DIDIPIO; that on October 20, 1995, a Share Purchase Agreement was entered into by and between ARIMCO and ANGLO wherein the parties agreed that upon faithful compliance with the terms and conditions of the Agreement, ANGLO will sell and ARIMCO will by TWO HUNDRED SIXTY shares of stock for a cash purchase price of ONE HUNDRED NINETY SIX MILLION FIVE HUNDRED THOUSAND PESOS (P196,5000,000.00); that ARIMCO is a corporation organized under Philippine Laws; and that the assets of DIDIPIO at the time of the transfer of the shares from ANGLO to ARIMCO on October 20, 1995 and even at present, do not consist "principally" (i.e., more than 50% of DIDIPIO's assets) of real property interest located in the Philippine. In reply, please be informed that pursuant to Article 13, paragraphs 3 and 4 of the RP-Malaysia Tax Treaty, stating: "ARTICLE 13 "GAINS FROM THE ALIENATION OF PROPERTY (1) . . . (2) . . . (3) Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Gains from the alienation of an interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. (4) Gains from the alienation of any property or assets, other than those mentioned in paragraphs 1, 2, and 3 if this Article, shall be taxable only in the Contracting State of which the alienator is a resident. the gains which will be realized by ANGLO from its sale of share of stock in DIDIPIO to ARIMCO shall be taxable only in Malaysia. However under the aforequoted provision of paragraph 3 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 originally 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). Since as represented, DIDIPIO does not have real properties or real property interests located in the Philippines; that DIDIPIO's investment in the shares of stock of AUMEX should not be considered real property interest; that even if an FTAA may be considered as real property interest, DIDIPIO is not itself a party to the FTAA but rather its investee corporation, AUMEX; and that while AUMEX is 100% owned by DIDIPIO, its interest in the FTAA cannot be directly attributed to DIDIPIO in order that DIDIPIO's assets can be considered as consisting principally of real property interest located in the Philippines, the sales of the shares of stock in DIDIPIO by ANGLO, a Malaysian resident is well within the contemplation of the tax exemption provision of the RP-Malaysia Tax Treaty. In view of the foregoing considerations, this Office is of the opinion as it hereby holds that the gains realized from the sale by ANGLO of its shares of stock in DIDIPIO to ARIMCO is 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 actual facts are different, then this ruling shall be considered null and void. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue