Taxability of Gains that May be Realized from the Proposed Transfer of Shares of Stock

September 1, 1994 BIR RULING NO. 135-94 24 042-87 135-94 Misa Law Offices 7th Floor, Singapore Airlines Bldg. 138 Dela Costa St., Salcedo Village Makati, Metro Manila Attention: Atty . Dominique Misa Gentlemen : This refers to your letter dated July 18, 1990 requesting confirmation of your opinion that gains that may be realized by your client, Mr. Jose Ma. Ossorio, from the proposed transfer of his shares of stock in Victorias Milling Company, Inc., (VMC) to a holding Company, the Liberty Trading and Navigation Co. (LNTC), are not subject to Philippine income tax pursuant to Article 14(2) of the RP-US Tax Treaty. It is represented that VMC is a domestic corporation with office address at VMC Bldg., 165 Legaspi Village, Makati, Metro Manila, where your client, Mr. Jose Ma. Ossorio owns 41,000 shares constituting 1.37% of VMC's outstanding shares of stocks; that your said client, an American citizen and a resident in the United States, proposes to transfer all his VMC shares to LTNC, his wholly-owned holding company, duly incorporated in Florida, U.S.A., with an option of retaining a share to qualify him for membership in VMC Board of Directors; and that VMC's real property interest situated in the Philippines does not exceed 29% of its total assets and that proportion is not expected to increase at the time of actual transfer of the shares. In reply, please be informed that the Reservation Clause of the RP-US Tax Treaty, pertinent portion of which is quoted hereunder, states 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 of 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) It is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interest 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) Verification of the audited Financial Statement as of the Fiscal year ending August 31, 1990 shows that VMC's real property interest situated in the Philippines is 35.7% of its total assets and as represented, that proportion is not expected to increase at the time of actual transfer of the aforesaid shares. In view thereof, your opinion is hereby confirmed. Gains which may be realized by your said client from the transfer of his shares of stock in VMC to LTNC shall be taxable only in the United States pursuant to Article 14(2) of the RP-US Tax Treaty. This ruling is being issued based on the facts represented. If upon investigation it would be revealed that the facts are materially different then this ruling shall be considered as automatically revoked. cdtech Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue