Tax Consequence of a Transfer of Shares of Stock

July 26, 1988 BIR RULING NO. 355-88 25 (b) (5) (C) 176 136-82 355-88 Gentlemen : This refers to your letter dated June 20, 1988 requesting confirmation of your opinion to the effect that the capital gains if any which may be realized by your client, Imperial Chemical Industries PLC (ICI) from the transfer of its shares of stock in Philippine Explosives Corporation (PEC) to Impkemix Holdings South East Asia Limited (Holdings) are taxable only in the United Kingdom. cdti It is represented that ICI is a British corporation not engaged in trade of business in the Philippines; that PEX is a Philippine corporation engaged in manufacture of Industrial explosives; that ICI currently owns 240,671 shares of common stock in PEX with a par value of P100 each which it acquired at par; that it now intend to sell and transfer the said shares to Holdings, a Singapore corporation not engaged in trade or business in the Philippines; that the consideration of the transfer in 920,329 ordinary shares of Holdings with a value of Singapore $10 each; and that the contract transferring the shares will be executed abroad. In reply thereto, please be informed that your opinion is hereby confirmed. Article 12 of the RP-UK 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 business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State 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 a permanent establishment (alone or together with the whole enterprise) 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) . . ." The above transaction clearly falls under paragraph (4). Hence, the capital gains, if any, which may be realized by ICI are not taxable in the Philippines. Likewise, this Office hereby confirms your opinion that the aforesaid transfers of shares of stock are subject to the documentary stamp tax imposed under Section 176 of the Tax Code, as amended in the amount of fifty centavos on each P200 or fractional part thereof, of the par value of the shares transferred even if the transfer is effected abroad. (Sec. 20, Revenue Regulations No. 26, or the Revised Documentary Stamp Tax Regulations) Pursuant to Clause 6 of the Agreement of Sale, the documentary stamp tax shall be paid by Holdings. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner