BIR Ruling [UN-395-95]

November 14, 1995 BIR RULING [UN-395-95] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated September 28, 1995 requesting confirmation of your opinion that any capital gain from the sale by American Cyanamid Company (ACY), a non-resident American Corporation, of its stockholdings in Cyanamid Philippines, Inc. (CPI), a domestic corporation wholly-owned by ACY, to Wyeth Philippines, Inc. (WPI), another domestic corporation, is not subject to capital gains tax under the RP-US Tax Treaty. It is represented that ACY plans to sell its entire shareholdings in CPI to WPI; that as shown by the latest financial statement of CPI, a copy of which has been submitted to this Office, its real property interest does not exceed 50% of its total assets, and that the only property asset of the company are certain leasehold improvements amounting to P3,282,701.00 out of total assets of P208,349,169.00 as of 1994, or a mere 1.5% of total assets. In reply thereto, please be informed that your opinion is hereby confirmed. Gains which may be realized by ACY from the sale of its shares of stock in CPI to WPI shall be taxable only in the United States pursuant to Article 14 (2) of the RP-US Tax Treaty, hence, such 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 of 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 its entire assets, or a mere 1.5% as shown in its financial statements for the fiscal year ended November 30, 1994. 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