BIR Ruling [UN-075-95]

February 23, 1995 BIR RULING [UN-075-95] Sycip, Salazar, Hernandez & Gatmaitan 105 Paseo de Roxas 1200 Makati, Metro Manila Attention: Atty . Rolando V . Medalla, Jr . and Atty . Euney Marie J . Mata Gentlemen : This refers to your letter dated November 14, 1994 requesting for a ruling exempting your client, Afia Finance Corporation (Afia), from the payment of capital gains tax on its sale of its shares of stock in Monarch Insurance Company, Inc. (Monarch Insurance) in favor of Brunei Kahazanah Holdings, Ltd. (BKHL) pursuant to Article 14, Section 2 of the RP-US Tax Treaty. It is represented that Afia is a corporation existing under the laws of the State of Delaware, U.S.A.; that it sold its shares of stock in Monarch Insurance, a domestic corporation, in favor of BKHL, a corporation duly organized and existing under the laws of the British Virgin Islands with address at Suite 35A, Empire Tower, 182 Jalan Tun Razak 50400, Kuala Lumpur, Malaysia, at a purchase price of P19,353,562.40; that of the purchase price of P19,353,562.40, it derived a gain of P18,753,562.40 out of its investment of P600,000.00; that the said purchase price of P19,353,562.40 is to be paid by BKHL on October 28, 1994; and that no amount of withholding tax was paid in view of Article 14, Section 2 of the RP-US Tax Treaty. In reply, please be informed that the gain which was realized by Afia from the sale of its shares of stock in Monarch Insurance to BKHL shall be taxable only in the United States Pursuant to Article 14(2) of the RP-US Tax Treaty. Hence, said gain is not subject to Philippine 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 Philippines 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 Monarch Insurance located in the Philippines as appearing on its financial statement for the year ending December 31, 1993 is only 3.12% of its total assets, which is less than 50% of the value of its total assets.( BIR Ruling No. 136-92, dated April 28, 1992) cdtech Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)