Taxability of Sale, Barter or Exchange of Shares of Stock Listed and Traded Through a Local Stock Exchange

September 28, 1998 BIR RULING NO. 139-98 32 (B) (5)-000-00-139-98 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty . Jose A . Osana Gentlemen : This refers to your letter dated July 7, 1996 requesting for ruling that the sale, barter or exchange of shares of stock listed and traded through a local stock exchange by residents with which the Philippines has a tax treaty, is exempt from the percentage under Section 127 (A) of the Tax Code of 1997. In reply, please be informed that your opinion is hereby confirmed. Notwithstanding the re-classification of the tax on the sale, barter or exchange or shares of stock listed and trade through the local stock exchange from Title II (Tax on Income) to Title V of the Tax Code, the same is still covered by the provisions of tax treaties which grant to residents of treaty countries tax exemption on capital gain from the sales of shares of stock in domestic corporation. Article 13 [Article 14, in case of Thailand] of the said tax treaties contains substantially the same provisions on capital gains from alienation of shares of stock of a corporation which provides, as follows: "Gains from the alienation of shares of [the capital stock of] a company, the property of which consists [directly] principally of immovable property situated in a Contracting State, may be taxed in that State." "Gains from the alienation of any property [or assets] other than that referred to [those mentioned] in paragraphs [xxx] shall be taxable only in the Contracting State of which the alienator is a resident." Article 14 of the RP-US Tax Treaty and Reservation Clause of the same treaty provide: "Article 14 Capital Gains xxx xxx xxx 2. Gains from the alienation of any property other than those mentioned in paragraph (1) or in Article 7 (Income from Real Property) shall be taxable only in the Contracting State which the alienator is a resident. US Reservation No. 1: "Notwithstanding the provisions of Article 14 of the Convention relating to capital gains, both the Philippines and United States may tax gains from the disposition of an interest in a corporation if its assets consists 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." Under the above mentioned provisions in the tax treaties concluded by the said countries. the gains from alienation of shares of stock is taxable only in the country of the alienator except where the property of the domestic corporation whose shares are subject of sale consists principally of immovable property situated in the Philippines, i.e., more than 50% of the entire assets in terms of value. This has been affirmed by our previous rulings in BIR Rulings Nos. 007-96, January 18, 1996 (RP-Japan Tax Treaty): 037-96, March 7, 1996 (RP-Malaysia Tax Treaty); 261-89, December 15, 1989 and 100-94, April 28, 1994 (RP-Singapore Tax Treaty);002-93, January 13, 1993 and 385-93, September 30, 1993 (RP-Sweden Tax Treaty); 135-94, September 1, 1994 (RP-US Tax Treaty), among others. prcd Furthermore, it appears that the reclassification of the tax on the sale, barter or exchange of shares of stock listed and traded through the stock exchange as a percentage tax under R.A. 7717 does not remove the said sale, barter or exchange from the coverage of the provisions of the above-mentioned tax treaties. Article 2 of Indonesia, Italy, Japan, Korea, Malaysia, Singapore, Sweden, Thailand and the United States contains substantially similar provision which provides, as follows: "The Convention [or Agreement] shall apply to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. . . ." In accordance with the above provision and for the reason that the said treaties do not distinguish whether or not the shares of stock being sold are listed and treated in the local stock exchange, the exemption provisions of said tax treaties will continue to apply to the tax on shares of stocks not traded through local exchange remaining under Title II (Tax on Income) of the Tax Code as well as to the tax on shares of stock listed and traded through the local stock exchange which has been reclassified as subject to percentage tax under Title V (Other Percentage Taxes) of the Tax Code. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. cdll Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue