Any Capital Gains which a Foreign Corporation might Derive from the Disposition of Its Shares in a Domestic Corporation are Not Subject to Capital Gains Tax

September 18, 1991 BIR RULING NO. 194-91 24 195-90 194-91 Gentlemen : This refers to your letter dated March 26, 1991 requesting for a ruling that your client, the Fuji Xerox Co., Ltd., is exempt from paying tax on any capital gains which it might realize from the sale of its shares of stocks of the Philippine Fuji Xerox Corporation to Fuji Xerox Asia Pacific Pte. Ltd. cdti It is represented that Fuji Xerox Co. Ltd. (FXJ) is a corporation duly organized and existing under the laws of Japan; that FXJ owns 40% of the stocks of Philippine Fuji Xerox Corporation (PFX), a domestic corporation; that FXJ is selling its shares of stocks in PFX to Fuji Xerox Asia Pacific Pte. Ltd. (FXS), a corporation duly organized and existing under the laws of Singapore and which is wholly-owned subsidiary of FXJ; that FXJ is transferring said stocks of book value; and that, finally, PFX's real property interest in the Philippines relative to its total assets is at 11.14% or P31,228,030 to P280,366,032. In reply, please be informed that Article 13, paragraph 4 of the RP-Japan Tax Treaty stipulates that " (gains from the alienation of shares of a company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State ." (emphasis supplied). In relation to the above-quoted treaty provision, Revenue Regulations No. 4-86 provides as follows: "SEC. 1. Objective Under Philippine tax treaties, capital gains derived by residents of the other Contracting states from the disposition of a share or of an interest in a Philippine Corporation are taxable in the Philippines only if the assets of such corporation consist principally of real property interest located in the Philippines . . . . (emphasis supplied). Section 2. Definitions for purposes of these Regulations, the following terms and phrases shall be understood to mean (a) " Real Property Interest " interests on properties enumerated in Section 3 which are not, however, exclusive of others that are similarly situated. As used in the treaties and in these Regulations, it shall be understood to include real properties as understood under Philippine laws; b) "Principally", "wholly or principally", "directly Principally" or "attributable" more than fifty percent of the entire assets in terms of value ; (emphasis supplied) xxx xxx xxx On the basis of all the foregoing, it is the opinion of this Office as it hereby holds that the sale by Fuji Xerox Co., Ltd. to Fuji Xerox Asia Pacific Pte. Ltd. of the shares of stocks issued by Philippine Fuji Xerox Corporation to the former is not subject to capital gains tax. The value of the real property interests of Philippine Fuji Xerox Corporation that are located in the Philippines does not exceed fifty percent of its total assets. Such being the case, any capital gains which Fuji Xerox Co., Ltd. might derive from the disposition of its shares in Philippine Fuji Xerox Corporation are not subject to capital gains tax. cdta Very truly yours, SGD.) EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge