Tax Exemption on Gains Realized by NSC from the Sale of Its Shares of Stock

May 29, 1987 BIR RULING NO. 143-87 24 042-87 143-87 Gentlemen : This refers to your letter dated May 13, 1987 requesting a ruling to the effect that the sale by National Semiconductor Corporation (NSC) of its shares in National Semiconductor Phils., Inc. (NSPI) its wholly owned Philippine subsidiary to a group of buyers which include a Team Pacific Corporation (TPC) is not subject to the capital gains tax pursuant to Article 14(2) of the RP-US Treaty. It is represented that NSC is a foreign corporation incorporated under the laws of the state of California, U.S.A., and not doing business in the Philippines; that NSPI and TPC are corporations organized under Philippine law; that NSC will sell all its 7,513,920 outstanding shares in NSPI, and that less than fifty (50%) of NSPI's assets are real property and/or fixed assets. In reply thereto, please be informed that gains which may be realized by NSC from the sale of its shares of stock in NSPI to TPC shall be taxable only in the United States pursuant to Art. 15(2) of the RP-US Tax Treaty. Hence, said gain is not subject to Philippine tax. The Reservation Clause of the RP-US Tax Treaty, pertinent portion of which is quoted hereunder 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) does not apply in this case. It is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests 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) In the instant case, NSPI Financial Statements for the years ended May 31, 1986 and 1985 show that its real property or fixed asset is less than 50% of the value of its total assets. Very truly yours, (SGD.) EUFRACIO B. SANTOS Deputy Commissioner