Tax Consequences of Certain Transactions First Philippine Capital Fund L.P.(Partnership).

May 28, 1987 BIR RULING NO. 142-87 25-b 000-00 142-87 Gentlemen : This refers to your letters dated May 4 and ___, 1987 requesting a ruling on the tax consequences of certain transactions of your client, First Philippine Capital Fund L.P.(Partnership). It appears that Partnership is a limited partnership proposed to be formed under the laws of the State of Delaware, U.S.A., that it will be an investment vehicle designed to enable investors, including foreign banks, to pool, their holdings of certain foreign debt obligations of the Central Bank of the Philippines (Central Bank) in order to facilitate the conversion of those obligations into equity investments in Philippine enterprises under the Philippine Program for the Conversion of Philippine External Debt into Equity Investments (Conversion Program) governed by Central Bank Circular 1111, that the Partnership will be capitalized at a minimum of US$125 million and a maximum of US$250 million, that the Partnership will have a general partner (General Partner) and limited partners (Limited Partners), that the General Partner of the Partnership will be Shearson Lehman International Investments, Inc., a corporation organized under the laws of the State of Delaware, US, that the International Finance Corporation (IFC) an international financial institution, as a special Limited Partner will assist the General Partner in certain non-management aspects of the Partnership's Operations; that the other Limited Partners are expected to be from the United States and perhaps from the United Kingdom, France, the Netherlands, Switzerland, Luxemburg, West Germany, Japan, HongKong, Singapore, Canada, Kuwait and Saudi Arabia, that some of the Limited Partners may be bank affiliates of, or banks with offshore banking units (OBUs) or foreign currency deposit units (FCDUs) in the Philippines. It appears also that the Limited Partners will exchange "Qualified Debt" which they hold for units of limited partner interest (undivided interests) in the Partnership (the units), that qualified debt means foreign debt obligations (1) covered by the restructuring agreement signed by the Central Bank as obligor and dated as of January 10, 1986, as amended (Restructuring Agreement (2) denominated in United States dollars, and (3) bearing interest at the LIBO Rate (as defined in the Restructuring Agreement), that the partnership will invest substantially all of the qualified debt in common stock and preferred stock of Philippine enterprises under the Conversion Program; that it might also invest in debt securities issued by such enterprises, including debt securities convertible into equity; that the partnership intends to purchase and hold securities for long term capital appreciation and does not expect to buy and sell securities for short term gain, that the stock and the debt securities will be in the name of the partnership and that the partnership will limit itself to such investment activity. The Partnership will establish a representative office in the Philippines which will have the following functions in relation to the Partnership's investment activity: (1) identifying and seeking out suitable investments, (2) negotiating the terms of, and concluding contracts for the acquisition of investments, (3) supervising and monitoring the investments, including representing the Partnership to the extent allowed by law on the board of directors of the corporation in which the investment is made, as well as giving advice to the corporation concerned without remuneration (4) liaising with governmental and other institutions with respect to such investments and Qualified Debt, and (5) disposing of the investments in the Philippines (a) in privately negotiated sales transactions, (b) in public offerings conducted through broker dealers (in the ordinary course of their business) to whom compensation negotiated at arm's length is paid, or most likely, (c) in secondary offerings conducted through broker dealers (likewise in the ordinary course of their business) made in conjunction with primary public offering made by the Philippine company, or (d) outside of the Philippines. An investor's interest in the Partnership would be carried at the net carrying amount of Qualified Debt contributed, reduced for the percentage of debt converted. For example, if 10% of Qualified Debt were converted, an investor would continue to carry 90% of its investment in the Partnership on its balance sheet as foreign loans. From these investments, the Partnership will earn income in the form of dividends, interest, and gain on the sale or exchange of equity and debt securities. Income of the Partnership as a general rule will be allocated to all Partners in proportion to their respective capital accounts. In reply thereto, I have the honor to inform you as follows: 1. The partnership is not engaged in a trade or business in the Philippines as its activities are purely investment related and as ruled by the Board of Investments, merely constitute economic activities of a representative office. Said office is not considered a permanent establishment in the Philippines as this term (permanent establishment) is defined in Article 5 of the RP-US Tax Treaty; hence, its business profits are not taxable in this country (Art. 8(1), Ibid ). 2. Pursuant to Art. 3 (1)(b) of the RP-US Tax Treaty, the term "resident of the United States" means (i) a United States corporation; and (ii) any other person (except a corporation or any entity treated as a corporation for United States tax purposes) resident in the United States for purposes of United States tax laws but in the case of a partnership, estate or trust only to the extent that the income derived by such partnership, estate or trust is subject to United States tax as the income of a resident either in the hands of the respective entity or of its partners or beneficiaries. Such being the case, the preferential tax rates provided in Articles 11 (dividends), 12 (interest) and 14 (tax exemptions on certain capital gains) of the RP-US Tax Treaty shall apply to the General and Limited Partners who are U.S. residents (U.S. Limited Partners) with respect to their share of dividends, interest and capital gain of the Partnership allocable or allocated to such Limited Partners. 3. Foreign corporations and non-residents alien individuals are taxed in the same manner as U.S. corporations and U.S. residents on their income which is effectively connected with the conduct of a trade or business in the United States. (see Sections 882 (a) (1), 871 (b)(1), U.S. Internal Revenue Code) Consequently, the preferential tax rates provided in the RP-US Tax Treaty shall be applied to the Partnership income allocable to foreign corporations and non-resident foreign individuals, to the extent of such effectively connected income. 4. Foreign Limited Partners who qualify as residents of countries with which the Philippines has an income tax treaty are entitled to the preferential tax treaty treatment provided for under the specific treaty concerned with respect to their share of partnership income. 5. The Partnership would be considered as a corporation entitled to the benefits of Art. 11 (2)(b) of the RP-US Tax Treaty. Art. (2)(2) of the RP-US Tax Treaty provides that any other term used in the Convention and defined in the Convention shall, unless the context otherwise requires, have the meaning which it has under the laws of the contracting State whose tax is being determined. Since the term "corporation" is not defined in the RP-US Tax Treaty, then it shall have the meaning which it has under our Tax Code. Under Section 20(b) of the Tax Code, the term "corporation" includes partnerships no matter how created or organized. Such being the case, the partnership would be considered a corporation entitled to the benefits of Art 11(2)(b) of the RP-US Tax Treaty. 6. IFC, being an international financing institution established by governments and in view of the immunity from taxation accorded IFC by member countries, including the Philippines, shall be exempt from Philippine tax with respect to its share of Partnership income pursuant to Section 29 (b) (8)(A) of the Tax Code (BIR Ruling No. 227-83 dated December 15, 1983.) 7. The interest income on qualified debt allocable to Limited Partners who have an OBU or FCDU in the Philippines, shall continue to be subject to the 10% tax under Section 25 (a)(4) and Section 25 (a)(6)(B) of the Tax Code, as amended by Executive Order No. 37. 8. Limited Partners who have either OBUs or FCDUs in the Philippines are considered resident foreign corporations. (Sec. 2, Revenue Regulations No. 10-76) Accordingly, the share of the dividend income of the Partnership allocable to the Limited Partners who have OBUs or FCDUs in the Philippines is not subject to tax under Title II of the Tax Code, pursuant to Section 25 (a)(6)(D) of the Tax Code, as amended by Executive Order No. 37. Moreover, said Limited Partners are not subject to the branch profit remittance tax on their share of the dividend income because the same is not considered branch profits which are effectively connected with the conduct of its trade or business in the Philippines [Sec. 25 (a)(5), Ibid ] 9. The interest income (other than interest on Qualified Debt) of, and gain on the sale or exchange of personal property which is allocable to the Limited Partners which have OBUs or FCDUs in the Philippines are subject to the preferential tax treatment under the various tax treaties with respect to interest income and capital gains. 10. The dividend income of the Partnership allocable to Limited Partners who are incorporated or resident of countries which do not impose any tax on dividends received from Philippine corporations are subject to a tax of 15% under Section 25 (b)(5)(B) of the Tax Code. (BIR Ruling No. 45-85). 11. The conversion transactions under Central Bank Circular No. 1111 and described in detail in Sections 21 to 24 thereof which the Partnership will utilize for purposes of investment in Philippine enterprises will not give rise to any Philippine income tax imposable on the Partnership and/or the individual partners. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner