BIR Ruling [UN-027-96]

January 19, 1996 BIR RULING [UN-027-96] Sycip Gorres Velayo & Co. 6760 Ayala Avenue, Makati, Metro Manila Attention: Atty . C . P . Noel Gentlemen : This refers to your letter dated September 19, 1995 requesting in behalf of your client, Profinda Holdings Corporation (PROFINDA) for a ruling that the capital gains from sale by Albright and Wilson (Australia), Ltd. (AWA) and Van Der Horst Limited (VDH) of their respective shareholdings in New Saga Power Corporation (NSPC), in favor of PROFINDA is exempt from income tax. It is represented that NSPC is a domestic corporation organized under the laws of the Philippines primarily to invest and provide venture capital as well as management and consultancy service, research and technology, in all types of business enterprises and projects in the Philippines including but not limited to entities and projects established for the purpose of generating power and electricity, and joint venture enterprises to build, operate and transfer projects in the Philippines; that AWA is a non-resident foreign corporation organized under the laws of Australia with office address at 610 St. Kilda Road, Melbourne, Australia; that VDH is also a non-resident foreign corporation organized under the laws of Singapore with office address at 11 Pandan Crescent, Singapore; that both AWA and VDH own shares of stock in NSPC which consist of the following: AWA VDH Preferred 212,500 187,500 Common 212,500 187,500 Total No. of Shares 425,000 375,000 ======= ======= that AWA and VDH propose to sell their entire shareholdings in NSPC to PROFINDA, a domestic corporation. In reply, please be informed that Article 13 of the RP-Australia Tax Treaty provides, viz: "Article 13 "ALIENATION OF PROPERTY "(1) Income from the alienation of real property may be taxed in the Contracting State in which the property is situated. "(2) For the purposes of this Article "(a) the term 'real property' shall have the meaning which it has under the laws in force in the Contracting State in which the property in question is situated and shall include "(i) a lease of land or any other direct interest in or over land; "(ii) rights to exploit, or to explore for, natural resources; and "(iii) shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting States or of rights to exploit, or to explore for, natural resources in one of the Contracting States; "(b) real property shall be deemed to be situated "(i) where it consists of direct, interests in or over land in the Contracting State in which the land is situated; "(ii) where it consists of rights to exploit, or to explore for, natural resources in the Contracting State in which the natural resources are situated or the exploration may take place; and "(iii) where it consists of shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting States or of rights to exploit, or to explore for, natural resources in one of the Contracting States in the Contracting State in which the assets or the principal assets of the company are situated. "(3) Subject to the provisions of paragraph (1), income from the alienation of capital assets of an enterprise of one of the Contracting States or available to a resident of one of the Contracting States for the purpose of performing professional services or other independent activities shall be taxable only in that Contracting State, but where those assets form part of the business property of a permanent establishment or fixed base situated in the other Contracting State, such income may be taxed in that other State." Under the foregoing provisions of the Tax Treaty, income derived from the alienation of capital assets of an Australian enterprise, i.e., the shares of stock of AWA in NSPC, is taxable only in Australia. Such being the case, the capital gains from the sale by AWA of its shares of stock in NSPC in favor of PROFINDA is exempt from Philippine income tax under the above-quoted provision of the RP-Australia Tax Treaty. (BIR Ruling No. 118-89 dated June 5, 1989) Moreover, Article 13 of the RP-Singapore Tax Treaty provides, viz: "Article 13 "GAINS FROM THE ALIENATION OF PROPERTY "(1) Gains from the alienation of immovable property may be taxed in the Contracting State in which such property is situated. "(2) 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 enterprise) or of such a fixed base may be taxed in the other State. However, gains derived by an enterprise 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 or aircraft, shall be taxable only in that State. "(3) Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. "(4) Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2 and 3 shall be taxable only in the Contracting State of which the alienator is a resident." The foregoing transaction involving alienation of shares of stock in a domestic corporation does not fall under paragraphs 1 and 2 above-quoted. Neither does it fall under paragraph 3 because it has been ascertained from the latest financial statements of NSPC that its property does not consist principally, which means less than 50% of real property located in the Philippines. Such being the case, the foregoing transaction falls under paragraph 4. Accordingly, the gains derived by VDH, a resident corporation of Singapore, from the sale of its 375,000 shares of stock in NSPC is not subject to capital gains tax under Section 22(b) in relation to Sections 21(d)(1) and 36(e) of the Tax Code, as amended, but is subject to tax only in Singapore. (BIR Ruling No. 100-94 dated April 28, 1994) cdta Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)