BIR Ruling [UN-191-95]

May 23, 1995 BIR RULING [UN-191-95] Sycip Salazar Hernandez & Gatmaitan 105 Paseo de Roxas 1200 Makati, Metro Manila Attention: Atty . Jose Perpetuo M . Lotilla and Euney Marie J . Mata Gentlemen : This refers to you letter dated December 5, 1994 requesting for and in behalf of your client, Grefco, Inc. ("Grefco"), a ruling that it is exempt from Philippine income tax on any gain realized from its sale of 2,500,200 shares of stock of Induplex, Inc. (Induplex). cdtech It is represented that Grefco, a corporation duly organized and existing under the laws of the State of Delaware, U.S.A. with address at 3435 West Lomita Boulevard, Torrance, California 90505, U.S.A., sold its 2,500,200 shares of stock (at a selling price of P62,500,000.00) of Induplex, a domestic corporation with office address at Room 303, I-Care Building, 167 Legazpi cor. dela Rosa Sta., Legazpi Village, Makati City, to Induplex Holdings, Inc. (IHI), also a Philippine corporation, represented by Mr. Virgilio Romero. In reply thereto, please be informed that gains which may be realized by Grefco from the sale of its shares of stocks in Induplex shall be taxable only in the United States pursuant to Articles 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 which provides that 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 dispositions 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 its interest 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 Induplex located in the Philippines as appearing on its financial statement for the year ending December 31, 1993 is only 31.61% 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) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)