Taxability of Gains from Sale of Shares of Stock

September 19, 1989 BIR RULING NO. 202-89 24 007-89 202-89 Gentlemen : This refers to your letters dated August 22, 24 and 31, 1989 stating that you are a non-stock, non-profit, charitable-operating foundation, organized and existing under the laws of the State of Hawaii, U.S.A.; that you own a block of class "B" shares of Ayala Corporation; that Mermac, Inc., a corporation organized and existing under the laws of the Philippines with substantial holdings in Ayala Corporation, would like to purchase the Ayala shares owned by you; that Ayala Corporation is a corporation organized and existing under the laws of the Philippines which has become a purely holding company as of January 1, 1989; that prior to said date, Ayala Corporation was directly engaged in real estate operations and had substantial real estate holdings; that the interest in the real estate and real estate holdings of Ayala Corporation have since been spun off to a wholly-owned subsidiary, Ayala Land Inc.; that the financial statements of Ayala Corporation as of December 31, 1988 show that the real property interest based on book value amounted to 14% of its total assets; and that after the spin-off of Ayala Land, Inc. and the conversion of Ayala Corporation into a purely holding company, Ayala Corporation's real estate property interest has been reduced to 12% of its total assets as shown by its interim financial statements as of June 30, 1989. cdtech In connection therewith, you now request a ruling on the following: "1. Would the interest in real property in Ayala Land, Inc. be attributed to the mother company Ayala Corporation? If not, would the transaction still be exempt from capital gains tax even if the said real property interests of Ayala Land Inc. exceed 50% of its total asset base? cd "2. If, on the other hand, there is attribution, what basis would be used in determining the extent and value of the real property interest, book value as appearing in the financial statements of the companies concerned or fair market value?" In reply thereto, I have the honor to inform you that gains from sale of shares of stock shall be taxable only in the contracting state of which the alienator is a resident pursuant to Article 14(2) of the RP-US Tax Treaty. However, under the Reservation clause of said 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 assets 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) the Philippines may tax the gains derived from the disposition of interest in a corporation if its assets consist principally of real property interest located in the Philippines. "Real Property interest" means interest on properties enumerated in Section 3 of Revenue Regulations No. 4-86 which are not, however, exclusive of others that are similarly situated. As used in the treaties and in the Regulations, it shall be understood to include real properties as understood under the Philippine Laws. Moreover, "Principally" means more than 50% of the entire assets in terms of value (Sec. 2(a) and (b), Revenue Regulations No. 4-86). Real property interest in Ayala Land, Inc. cannot be attributed to Ayala Corporation since the stock investment of a corporation in its subsidiary which is engaged in the realty business is not included in the enumeration of real property interest and/or real properties enumerated in Section 3 of the aforesaid regulations. The aforementioned transaction is still exempt from capital gains tax even if the said real property interest of Ayala Land, Inc. exceeds 50% of its total asset base. The real property interest of Ayala Land, Inc. is not attributable to its mother company, Ayala Corporation. Since, as represented the real property interest of Ayala Corporation is less than fifty percent (50%) of its entire assets as shown in its financial statements for the six month period ended June 30, 1989, the Reservation clause of the RP-US Tax Treaty does not apply in this case. In view of the foregoing, this Office is of the opinion as it hereby holds that gains which may be realized by you from the sale of your shares of stock in Ayala Corporation shall be taxable only in the United States pursuant to Article 14(2) of the RP-US Tax Treaty. Said gain is not subject to Philippine tax. aisadc Very truly yours, (SGD.) JOSE U. ONG Commissioner