Taxability of Gains Realized by Union Carbide Corporation from the Sale of Its Shares of Stock

February 10, 1987 BIR RULING NO. 042-87 24 077-86 042-87 Gentlemen : This refers to your letter dated January 28, 1987 requesting a ruling to the effect that the sale by Union Carbide Corporation, a non-resident American Corporation incorporated under the laws of the State of Delaware, U.S.A. in 1917 and not doing business in the Philippines, of all of its stockholdings consisting of 950,000 shares in the capital stock of Union Carbide Philippines, Inc. to Ralston Purina Overseas Battery Company also a non-resident American corporation not doing business in the Philippines, with residence and principal office in Delaware, U.S.A. is not taxable in the Philippines under Article 14(2) of the RP-US Tax Treaty. In reply thereto, please be informed that gains which may be realized by Union Carbide Corporation from the sale of its shares of stock in Union Carbide Philippines, Inc. to Ralston Purina Overseas Battery Company shall be taxable only in the United States pursuant to Article 14(2) of the RP-US Tax Treaty. Hence, said gain is not subject to Philippine Tax. The Reservation Clause of the RP-US Tax Treaty, pertinent portion of which is quoted hereunder as follows: "Article I " Notwithstanding the provisions of Article 14 of the Convention relating to capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of real property interest located in that country . Likewise, both countries may tax gains from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. That term "real property interest" is to have the meaning it has under the law of the country in which the underlying real property is located ." (Emphasis supplied) does not apply in this case. It is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consist principally of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of value. (Sec. 2, Revenue Regulations No. 4-86) In the instant case, Union Carbide Philippines, Inc. Financial Condition for the years ended December 31, 1985 and 1984 show that its real property or fixed assets is less than 50% of the value of its total assets. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner