Application for Tax Treaty Relief on the Assignment of Shares of Stock in a Domestic Corporation by a Non-Resident Foreign Corporation to Another Non-Resident Foreign Corporation

August 5, 1997 BIR RULING NO. 089-97 36 (e) 25 (b) (5) (C) (i) 000-00 089-97 Joaquin Cunanan & Co. 14/F Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Atty . George J . Lavadia Principal Gentlemen: This refers to your letter dated April 24, 1997 applying for a tax treaty relief on the assignment of the shares of stock in a domestic corporation by a non-resident foreign corporation to another non-resident foreign corporation. It is represented that your client, Australian Dairy Corporation (ADC), is a non-resident foreign corporation organized existing under the laws of Australia with no permanent establishment in the Philippines; that it has a total of 54,252,548 shareholdings (at P1.00 per share) in General Milling Corporation (GMC), a corporation organized and existing under the laws of the Philippines and whose assets do not consist principally of real property in the Philippines; that as part of the internal group restructure of ADC, its board of directors has resolved to assign its shareholding in GMC to its wholly-owned subsidiary, Austdairy Limited (ADL), another non-resident foreign corporation duly organized and existing under the laws of Hong Kong; that considering that the assets of GMC do not consist principally of land or real property and the fact that ADC is a resident of Australia and not doing business in the Philippines, the assignment of shares from ADC to ADL shall not be subject to capital gains tax in the Philippines pursuant to Article 13(3) of the RP-Australia Tax Treaty to wit: cdta "Article 13 " Alienation of Property "(1) Income from the alienation of real property may be taxed in the Contracting State in which that property is situated "(2) For the purposes of this Article "(a) the term "real property" shall have the meaning which it has under the laws in force in the Contracting State in which the property in question is situated and shall include "(i) a lease of land or any other direct interest in or over land; "(ii) rights to exploit, or to explore for, natural resources; and "(iii) shares of comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting States or of rights to exploit, or to explore for, natural resources in one of the Contracting States; "(b) real property shall be deemed to be situated "(i) where it consists of direct interests in or over land in the Contracting States in which the land is situated; (ii) where it consists of rights to exploit, or to explore for, natural resources in the Contracting State in which the natural resources are situated or the exploration may take place; and "(iii) where it consists of shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting States or of rights to exploit, or to explore for, natural resources in one of the Contracting states in the Contracting State in which the assets or the principal assets of the company are situated. "(3) Subject to the provisions of paragraph (1), income from the alienation of capital assets of an enterprise of one of the Contracting States or available to a resident of one of the Contracting States for the purpose of performing professional services or other independent activities shall be taxable only in that Contracting State, but, where those assets form part of the business property of a permanent establishment or fixed base situated in the other Contracting State, such income may be taxed in that other State." In reply, please be informed that under the above-quoted provisions of the RP-Australia Tax Treaty, the subject assignment of the 54,252,548 shares of stock (at P1.00 per share) of Australian Dairy Corporation, a non-resident foreign corporation organized under the laws of Australia, in General Milling Corporation, a domestic corporation, to Austdairy, another non-resident foreign corporation organized under the laws of Hong Kong, not being an assignment of shares of stock or comparable interests in a company, the assets of which consist wholly or principally of direct interest in over land in one of the Contracting States, or of rights to exploit, or to explore for, natural resources in one of the Contracting States, but rather an income from the alienation of its capital assets as provided for under paragraph (3) of the aforequoted Article 13 of RP-Australia Tax Treaty, the gains derived therefrom by the Australian corporation are taxable only in Australia. However, the said assignment of shares of stock for a consideration is subject to the documentary stamp tax provided for under Sec. 176 of the Tax Code, as amended. This ruling is issued on the basis of the foregoing facts as represented. If however, upon investigation, it will be disclosed that the facts are different from what have been represented, then this ruling shall be considered null and void. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue