Gains Realized by CIFC from Sale of Shares of Stock in RCBC and HI to Filipino Stockholder Not Subject to Philippine Tax

June 19, 1986 BIR RULING NO. 077-86 24 146-83 077-86 Gentlemen : This refers to your letter dated October 21, 1985 requesting confirmation of your opinion to the effect that the capital gains to be derived by your client, Continental International Finance Corporation (CIFC) from the sale of its entire shareholdings in Rizal Commercial Banking Corporation (RCBC) and House of Investments, Inc. (HI) are exempt from capital gains tax pursuant to Article 14(2) of the RP-US Tax Treaty. It is represented that CIFC is a U.S. corporation not engaged in trade or business in the Philippines; that it has investments in RCBC & HI, both domestic corporations which it now intends to sell and transfer to a Filipino stockholders of both RCBC & HI; that CIFC's shareholdings in RCBC & HI will be sold for P59,243,940.00 and P2,558,800.00 respectively; and the CIFC will derive capital gains of P13,347,556.08 for its RCBC shares and P1,374,821.62 for its HI shares. In reply, please be informed that gains which may be realized by CIFC from the sale of its shares of stock in RCBC & HI to a Filipino stockholder 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 of its assets consist principally of a 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. The 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, which means more than 50% , of real property interest located in the Philippines. In the instant case, RCBC & HI Statements of Condition as of December 31, 1984, and 1983 show that its real property or fixed assets is less than 50% of its total assets. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner