Whether the Sale by Sawyer-Adecor International, Inc. (Sawyer-Adecor) of Its Shares of Stock in Nationwide Development Corporation (Nadecor), a Philippine Corporation, is Not Subject to Capital Gains Tax Pursuant to the RP-US Tax Treaty

March 17, 1994 BIR RULING NO. 077-94 24 143-87 077-94 Sycip, Salazar, Hernandez & Gatmaitan 106 Paseo de Roxas Makati, Metro Manila Attention: Yasmin A . Andaya Gentlemen : This refers to your letter dated June 26, 1990 requesting for a ruling to the effect that the sale by Sawyer-Adecor International, Inc. (Sawyer-Adecor) of its shares of stock in Nationwide Development Corporation (Nadecor), a Philippine corporation, is not subject to capital gains tax pursuant to Article 14(2) of the RP-US Tax Treaty. It is represented that Sawyer-Adecor is a non-resident foreign corporation organized under the laws of the State of Arizona, United States; that it has never engaged in trade or business in the Philippines; that it owned 7,000 shares of stock in Nadecor; that it sold all these shares to Messrs. Conrado T. Calalang and Jose G. Ricafort both Philippines residents, under a Stock Purchase Agreement executed in California which provides that the purchaser, shall pay to the seller US $636,780.60 in exchange for the shares; that the seller may request, at its option, that the purchasers pay part of the purchase price in cash and assign to the seller shares of the stock of Benguet Corporation valued at the prevailing market price, so that the total consideration paid shall equal US $636,780.60; and that the sale of the Nadecor stock shall constitute a sale of substantially all of the sellers assets. In reply thereto, please be informed that gains which may be realized by Sawyer-Adecor from the sale of its shares of stock in Nadecor 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 or 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 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 this particular case, NADECOR's Financial Statements and per investigation of BIR fieldmen, for the years ended March 31, 1990, shows that its real property interest is less than 50% of the value of its total assets. However, a documentary stamp tax should be paid on the transfer of the shares of stock of Nadecor at the rate of P.50 for every P200.00 par value or a total amount of P2,887.50 inclusive of surcharge and compromise penalty. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue