BIR Ruling [UN-074-95]

February 22, 1995 BIR RULING [UN-074-95] Sycip Salazar Hernandez & Gatmaitan 105 Paseo de Roxas 1200 Makati City Attention: Atty . Ernesto S . Taino, Jr . Gentlemen : This refers to your letter dated February 13, 1995 requesting for tax exemption from the payment of capital gains tax under the RP-US Tax Treaty on the sale by a non-resident U.S. corporation of its shares of stocks in a Philippine corporation. cdtech It is represented that your client, Chemical International Finance, Ltd. (CIF), is a non-resident corporation organized under Section 25A of the Federal Reserve Act of the United States of America and owns 3,710,719 shares in Far East Bank and Trust Company (FEBTC), a domestic banking corporation; that CIF is not engaged in trade or business in the Philippines; that on December 23, 1994, a Share Purchase Agreement was made by and between the Sakura Bank, Limited (SBL) and CIF wherein it was agreed by the parties that upon their faithful compliance with the terms and conditions of the Agreement, CIF will sell and SBL will buy THREE MILLION SEVEN HUNDRED TEN THOUSAND SEVEN HUNDRED NINETEEN shares of stock for a cash purchase price of U.S.$ ONE HUNDRED THIRTY-THREE MILLION TWO HUNDRED FIFTY-FOUR THOUSAND AND EIGHT HUNDRED NINETY-SIX PESOS (US$133,254,896.00) on closing date, i.e., on February 28, 1995; that SBL is a banking corporation organized under the laws of Japan and is not engaged in trade or business in the Philippines; that the assets of FEBTC at present do not, and at the time of the transfer of the shares from CIF to SBL on February 28, 1995, will not consist "principally" (i.e., more than 50% of FEBTC's assets) of real property interests located in the Philippines. In reply, please be informed that the gains which will be realized by CIF from its sale of shares of stock in FEBTC to SBL shall be taxable only in the United States pursuant to Article 14(2) of the RP-US Tax Treaty. Hence, said gain will not be subject to Philippine income tax. The Reservation Clause of the RP-US Tax 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 estate 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.) does not apply in this case. It is to be noted that under the Reservation Clause, the Philippine may tax the gains derived from the disposition of interests in a corporation if its assets consist principally of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of value (Sec. 2, Revenue Regulations No. 4-86). The value of the real property interest of FEBTC located in the Philippines as appearing in its financial statements as of December 31, 1993 is only 3.70%, which is less than 50% of the value of its total assets. (BIR Ruling No. UN-218-94 dated July 20, 1994). However, notwithstanding this exemption, the proposed sale is subject to the documentary stamp tax in accordance with Section 176 of the Tax Code, as amended. This ruling is issued on the basis of the foregoing facts as represented. However, if it will be disclosed upon investigation that the facts are different, then this ruling shall be considered null and void. aisadc Very truly yours, ALICIA P. CLEMENO Assistant Commissioner Legal Service