Capital Gains Tax Derived by a Corporation in Japan from the sale of Its Preferred Shares of Stock are Subject to Tax Only in Japan

September 10, 1987 BIR RULING NO. 280-87 24 (e) (2) 017-86 280-87 Gentlemen : This refers to your letter dated May 19, 1987 to Revenue District Office No. 32, Makati East, Metro Manila, requesting a certification to the effect that the gain of P899,980.00 derived by your client. Mitsubishi Bank Ltd., a corporation organized and existing under the laws of Japan from the sale of its 999,998 preferred shares of stock of the Bank of the Philippine Islands to the Bank of the Philippine Islands as trustee of the Bank of the Philippine Islands Employees' Retirement Trust Fund is exempt from the capital gains tax pursuant to the RP-Japan Tax Treaty. In reply thereto, I have the honor to inform you that Article 13 of the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income provides, viz: "ARTICLE 13 "1. Gains derived by a resident of a Contracting State from the alienation of immovable property as defined in paragraph (2) of Article 6 and situated in the other Contracting State may be taxed in that other Contracting State. "2. Gains from the alienation of any property, other than immovable property, forming part of the business property of a permanent establishment which is an enterprise of a Contracting State or of any property, other than immovable property, pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other Contracting State. "3. Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic and any property, other than immovable property, pertaining to the operation of such ships or aircraft shall be taxable only in that Contracting State. "4. 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. "5. Gains from the alienation of any property other than those referred to in paragraphs (1), (2), (3) and (4) shall be taxable only in the Contracting State of which the alienator is a resident." The aforesaid stock transaction falls within the purview of paragraph 5 above quoted. Accordingly, and considering that your client is a resident of Japan, the capital gains tax of P899,980.00 derived by it from the sale of its 999,998 preferred shares of stock of the Bank of the Philippine Islands are subject to tax only in Japan. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner