Taxability of Sales of Shares Held by a SIngaporean Corporation in a Domestic Corporation

April 28, 1994 BIR RULING NO. 100-94 21 67-90 100-94 Quisumbing, Torres & Evangelista 11th Floor, Pacific Star Bldg., Makati Ave. cor. Sen. Gil Puyat Ave. Makati, Metro Manila Attention: Atty . Natividad B . Kwan Gentlemen : This refers to your letter dated January 12, 1993 requesting for a ruling that the sales of shares held by Alfa-Laval South East Asia Pte. Ltd. (ALSEA) in Alfa-Laval Raco (Phils.), Inc. (ALRACO), a domestic corporation, in favor of Tetra Pak Pacific Private, Ltd. (TPP) is exempt from tax. cdt It is represented that ALSEA is a corporation organized under the laws of the Republic of Singapore with an Office address at 11 Joo Koon Circle, Jurong, Singapore 2262; that ALRACO is a domestic corporation duly registered with the Securities and Exchange Commission, engaged in the wholesale of agricultural and industrial products; that ALSEA owns 48,000 shares in ALRACO, 32,000 shares of which were subscribed at par value of P3,200,000.00 and the remaining 16,000 shares were acquired through stock dividend; that ALSEA proposes to sell its 48,000 shares in ALRACO to TPP, which transaction will result in capital gains for ALSEA; and that the property of ALRACO does not consist principally of immovable property situated in the Philippines as evidenced by the company's financial statement. In reply thereto, I have the honor to inform you that Article 13 of the RP-Singapore Tax Treaty provides, viz. : "Article 13 "GAINS FROM THE ALIENATION OF PROPERTY "1. Gains from the alienation of immovable property may be taxed in the Contracting State in which such property is situated. "2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing professional services, including such gains from the alienation of such permanent establishment (alone or together with the whole enterprise) or of such a fixed base may be taxed in the other State. However, gains derived by an enterprise of a Contracting State from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships or aircraft, shall be taxable duly in that State. 3. Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Gains from the alienation of an interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. 4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2, and 3, shall be taxable only in the Contracting State of which the alienator is a resident." The foregoing transaction involving alienation of shares of stock in a domestic corporation does not fall under paragraphs 1 and 2 abovequoted. Neither does it fall under paragraph 3 because it has been ascertained from the latest financial statement of the ALRACO, that its property does not consist principally, which means less than 50% of the real property located in the Philippines. Such being the case, the foregoing transaction falls under paragraph 4. Accordingly, the gain derived by ALSEA, a resident corporation of Singapore from the sale of its 48,000 shares of stock in ALRACO is not subject to the capital gains tax under Section 22(b), in relation to Sections 21 (d) (1) and 36 (e) of the Tax Code, as amended but is subject to tax only in Singapore. Very truly yours, VICTOR A. DEOFERIO, JR. Deputy Commissioner (Officer-in-Charge)