Exemption from Capital Gains Tax

October 9, 1990 BIR RULING NO. 195-90 24 11-82 195-90 Gentlemen : This refers to your letter dated February 14, 1990 stating, in behalf of your client, Nicholas Kiwi Philippines, Inc., as follows: "Our said client is a corporation organized and existing under Philippine laws. It is engaged in the business of manufacturing pharmaceuticals and consumer products. It is a wholly-owned subsidiary of FIDAPI LIMITED, a corporation organized and existing under the laws of Cardiff, Wales, United Kingdom with registered office address at 128 Queen Victoria Street, London. "On January 31, 1990, it reacquired 12,437 of its issued shares from its parent, FIDAPI LIMITED at P388.40 per share which is the book value per share per company's latest financial statements. The par value per share is P100 only. Accordingly, there is a capital gain of P288.40 per share." In connection therewith, you now request a ruling as to whether the gain of P288.40 per share is subject to the capital gains tax in the light of the RP-United Kingdom of Great Britain and Northern Ireland Tax Treaty. In reply thereto, I have the honor to inform you that Article 12 of the RP-United Kingdom of Great Britain and Northern Ireland Tax Treaty provides, viz: "ARTICLE 12 " GAINS FROM THE ALIENATION OF PROPERTY "(1) Capital gains from the alienation of immovable property, as defined in paragraph (2) of Article 6, may be taxed in the Contracting State in which such property is situated. "(2) Capital gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing professional services, including such gains from the alienation of such permanent establishment (alone or together with the whole enterprises) or of such a fixed base, may be taxed in the other State. "(3) Notwithstanding the provisions of paragraph (2) of this Article, capital gains derived by a resident of a Contracting State from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft shall be taxable only in that Contracting State. "(4) Capital gains from the alienation of any property other than those mentioned in paragraphs (1), (2) and (3) of this Article shall be taxable only in the Contracting State of which the alienator is a resident. "(5) . . . It is clear from the aforequoted that the capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2, and 3 of Article 12 of the treaty shall be taxable only in the State where the alienator is a resident. Inasmuch as the sale of shares of stock is not among those mentioned in said paragraphs 1, 2 and 3 of Article 12, the gains derived by FIDAPI LIMITED which is a resident of the United Kingdom from the sale of its 12,437 shares to your client, Nicholas Kiwi Philippines, Inc. are not subject to the capital gains tax under Section 24 (e)(2)(A) and (B) of the Tax Code, as amended but are subject to tax only in the United Kingdom. Very truly yours, (SGD.) JOSE U. ONG Commissioner