Capital Gains Derived from Sale of Interests on Which Capital Gains Tax Was Paid Not Subject to Branch Profits Remittance Tax

December 5, 2001 BIR RULING NO. 055-01 Sec. 28 (A) (5) 000-00 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. J.A. Osana Partner, Tax Division Gentlemen : This refers to your letters dated September 5 and December 11, 2000 requesting, on behalf of your clients, Oxbow-Mindanao I Partners CV (OMP I) and Oxbow-Mindanao II Partners (OMP II), for confirmation that the capital gains derived from the sale of their respective interests in Mindanao I Geothermal Partnership (MGP I) and Mindanao II Geothermal Partnership (MGP II), respectively, on which capital gains tax (CGT) has been paid, are not subject to the branch profits remittance tax (BPRT). It is represented that OMP I and OMP II are limited partnerships established under the laws of Netherlands; that OMP I and OMP II wanted to hold interests directly with local partnerships but were precluded by an opinion previously issued by the Securities and Exchange Commission (SEC) requiring that a branch be established in the Philippines; that OMP I and OMP II applied with the SEC for licenses to establish Philippine branches, which the SEC granted on February 20, 1995 and July 31, 1997, respectively; that these Philippine branches were established for the following reasons to hold interest in the two general partnerships, MGP I and MGP II, respectively, and not to engage in any active course of trade or business; and to comply with the then SEC's condition for allowing foreign entities to hold interests in the Philippine partnerships. that OMP I Philippine branch held 50% interest in MGP I and OMP II Philippine branch held 50% interest in MGP II; that the SEC licenses of the Philippine branches provide that they were established to act as partners of a Philippine partnership, which will develop, own, operate and finance the Mt. Apo geothermal project and to act as holding companies for the investments of the head offices in the Philippines; that in June 2000, OMP I and OMP II sold their respective partnership interests in MGP I and MGP II, and paid the CGT of 5% 10% based on the gains derived from the sale of their partnership interests; that the BIR has issued the corresponding Tax Clearance Certificate and Certificate Authorizing Registration for the two sale transactions. In connection therewith, you now request for a confirmation of your opinion that the remittance of the capital gains derived from the sale by OMP I and OMP II of their respective partnership interest in MGP I and MGP II is not subject to BPRT. In reply thereto, please be informed that the remittance of capital gains derived from the sale by OMP I and OMP II of their partnership interests in MGP I and MGP II, is not subject to BPRT. As represented, the Philippine branches of OMP I and OMP II were established in the Philippines only in compliance with the condition then imposed by the SEC to qualify foreign corporations to hold interest in Philippine partnerships and that these foreign investors have not engaged in a series of business transactions aimed at gaining profits. In fact, their SEC licenses only permit them to act as partners in a Philippine partnership and to act as holding companies for investments of the head offices in the Philippines. The act of selling their partnership interests is not a business undertaking but a single and isolated transaction for the purpose of liquidating their investments in the Philippines. Moreover, the SEC, in a later ruling dated August 8, 1998, held that a foreign corporation is now qualified to become a partner in a Philippine partnership without establishing a Philippine branch. Under this circumstance, if a non-resident foreign corporation directly holds interest in a Philippine partnership, the gains derived from divestment of interest would only be subject to CGT. The subsequent remittance thereof would no longer be subject to the BPRT, there being no branch. In contrast, in the case of OMP I and OMP II, the Philippine branches were set upon in compliance with the then requirement of the SEC as mentioned above. In view strictly of the foregoing circumstances under which the Philippine branches of OMP I and OMP II were established, we confirm that the remittance of the said capital gains shall not be subject to BPRT imposed under Section 28 (A) (5) of the Tax Code of 1997. This ruling is being issued based on the facts as presented and solely to address the above-mentioned remittance of capital gains and no other. However, if upon investigation, it will be disclosed that the facts are different, then the ruling shall be considered null and void. Very truly yours, (SGD.) RENE C. BAEZ Commissioner of Internal Revenue