BIR Ruling [UN-394-95]

November 10, 1995 BIR RULING [UN-394-95] Sycip Gorres Velayo & Co. 6760 Ayala Avenue, Makati, Metro Manila Attention: Atty . E . C . Alcantara Gentlemen : This refers to your letter dated October 19, 1995 requesting in behalf of your client, Ampang Industries Philippines Co., Inc. (AICPI) for a ruling that the gains realized by Purcare (M.) SDN. BHP (Purcare) from the sale of its shares of stock in AICPI to Illinois Tool Works, Inc. (ITWI) is exempt from capital gains tax pursuant to Art. 13 of the RP-Malaysia Tax Treaty. It is represented that AICPI is a domestic corporation duly registered with the Securities and Exchange Commission; that it is engaged in the manufacture of semi-conductor packaging materials, parts, accessories and kindred articles; that Purcare, a corporation organized and existing under the laws of Malaysia, owns 1,414,226 shares of AICPI or 100% of the latter's issued and outstanding capital stock; that on August 3, 1995, Purcare agreed to sell all its shares of stock in AICPI to ITWI; that on said date, the real property interest of AICPI in the Philippines did not exceed 10% of the entire value of its total assets; that said percentage is not expected to increase at the time of the actual transfer of the shares. cdtech In support of your request, you submitted copies of the following documents: 1) Financial Statements (FS) of AICPI for the years ending December 31, 1994 and 1993; 2) Interim FS as of August 31, 1995; and 3) Letter of Intent dated August 3, 1995 of ITWI to Mr. Yok Kok Kong of Purcare. In reply, please be informed that Articles 13 of the RP-Malaysia 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 or aircraft operated by an enterprise of a Contracting State in international traffic and movable property pertaining to the operation of such ships or aircraft, shall be taxable only in that State of which the enterprise is a resident. "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. Gains from the alienation of an interest in a partnership or a trust, 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 or assets, other than those mentioned in paragraphs 1, 2 and 3 of the Article, shall be taxable only in that 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 AICPI 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 Purcare, a resident corporation of Malaysia from the sale of its 1,414,226 shares of stock in AICPI 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 Malaysia. (BIR Ruling No. 100-94 dated April 28, 1994) Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)