BIR Ruling [UN-397-95]

October 14, 1995 BIR RULING [UN-397-95] Romulo Mabanta Buenaventura Sayoc & de los Angeles 4th Floor King's Court I 2129 Chino Roces Avenue Makati City Attention: Attys . Carlos G . Baniqued and Priscilla B . Valer Gentlemen : This refers to your letter dated September 4, 1995 stating that Federal Phoenix Assurance Co., Inc. (Federal) is a domestic corporation duly registered with the Securities and Exchange Commission; engaged in the insurance business; that Two Million Four Hundred Thousand (2,400,000) shares with a par value of Ten Pesos (P10.00) per share worth Twenty Four Million Pesos (P24,000,000.00) or Forty Percent (40%) of the total outstanding capital stock of Federal (shares) used to be owned by Phoenix Assurance Plc. (Phoenix), a corporation duly organized and existing under the laws of the United Kingdom and not engaged in trade or business in the Philippines; that on August 17, 1984, a merger between Phoenix and Sun Alliance and London Insurance Plc. (Sun), another corporation duly organized and existing under the laws of the United Kingdom and not engaged in trade or business in the Philippines, was effected in and in accordance with the laws of the United Kingdom; that under the terms of the merger, Sun was the surviving corporation; that consequently, the Shares which stand in the name of Phoenix in the books of Federal are owned by Sun since the effectivity of the merger in 1984; and that Sun would now want to sell the Shares to Sun Alliance Insurance Ltd. (Sail), another corporation organized and existing under the laws of the United Kingdom not engaged in trade or business in the Philippines. Based on the foregoing, you now request in behalf of Federal, a confirmation that: cdta 1. The first transfer of the Shares from Phoenix to Sun pursuant to the merger effected in and in accordance with the laws of the United Kingdom is not a taxable event in the Philippines, hence, not subject to the 10%/20% capital gains tax imposed under Section 25(b)(5)(c) of the Tax Code, as amended; 2. The second transfer of the Shares from Sun to Sail pursuant to a sale is likewise not subject to the 10%/20% capital gains imposed under Section 25(b)(5)(c) of the Tax Code, as amended, pursuant to Article 12 of the RP-United Kingdom Tax Treaty; 3. However, both transfers of the Shares shall be subject to documentary stamp tax (DST) as follows: a. The first transfer of the Shares shall be subject to the DST rate prevailing in 1984 of P0.50 for every P200 of the par value or a fraction thereof of the Shares. Since the DST should have been paid on the day the transaction was had in 1984, the 25% surcharge shall be imposed. b. The second transfer of the Shares from Sun to Sail shall be subject to the DST imposed under Section 176 of the Tax Code, as amended of P1.00 for every P200.00 of the par value or a fraction thereof of the Shares; and 4. Upon presentment of proof of payment of DST, the corporate secretary of Federal can register the transfers of the Shares from Phoenix to Sun and from Sun to Sail in the Stock and Transfer Book of the Corporation and cancel and issue new Stock Certificate in the name of the transferee. In reply, please be informed that pursuant to Article 12 of the RP-United Kingdom Tax Treaty, in relation to Section 25(b)(5)(c) of the Tax Code, as amended, stating "Article 12 "Gains from the Alienation of Property "(1) Capital gains from the alienation of immovable property, as defined in paragraph (2) of Article 6, may be taxed in the Contracting State in which such property is situated. "(2) Capital 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 a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in the other State. "(3) Notwithstanding the provisions of paragraph (2) of this Article, capital gains derived by a resident of a Contracting State from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft shall be taxable only in that Contracting State. "(4) Capital gains from the alienation of any property other than those mentioned in paragraphs (1), (2) and (3) of this Article shall be taxable only in the Contracting State of which the alienator is a resident. "xxx xxx xxx "SEC. 25. Rates of tax on foreign corporation . "(a) . . . "(b) Non-resident foreign corporations. "xxx xxx xxx "(5) Tax on certain incomes received by non-resident foreign corporation . "(A) . . . "(C) Capital gains realized from sale, exchange or disposition of shares of stock in any domestic corporation shall be subject to tax as follows: "(i) Net capital gains as defined in Section 33(a) (2) realized during each taxable year from sale or exchange or other disposition of shares of stock not traded through a local stock exchange: Not over P100,000 10% Over P100,000 20% no sale, exchange or disposition of shares of stock took place between Phoenix and Sun because there is no effective transfer of beneficial ownership. In a merger, the surviving/absorbing corporation (Sun) succeeds to the rights and liabilities of the absorbed corporation (Phoenix) and merely carries on the identity of the latter (Phoenix) [Cashman vs. Brownlee 27 N.E. 560]. Hence, no taxable transaction actually took place in the Philippines. Moreover, the transactions fall within the purview of paragraph 4 of the aforequoted provision of the RP-United Kingdom Tax Treaty, which is taxable only in the United Kingdom. (BIR Ruling Nos. 595-88 and 195-90 dated December 23, 1988 and October 9, 1990, respectively) Accordingly, your opinion is hereby confirmed that the first transfer of shares from Phoenix to Sun pursuant to the merger effected in and in accordance with the laws of the United Kingdom is not a taxable event in the Philippines, hence, not subject to the capital gains tax imposed under Section 25(b)(5)(c) of the Tax Code, as amended. Likewise, the capital gains, if any, which may be realized by Sun from the proposed sale of shares of stock to Sail shall be taxable only in the United Kingdom; hence, said capital gains to be realized shall be exempt from capital gains tax in the Philippines. On the other hand, the aforesaid transfers of shares of stock are subject to the documentary stamps tax (DST). (Section 20, Regulations No. 26 or the Revised Documentary Stamp Tax Regulations) Such being the case, your opinion that the transfer of the shares of stock from Phoenix to Sun pursuant to the merger which took place on August 17, 1984 shall be subject to the documentary stamp tax prevailing in 1984 which is P0.50 for every P200 or a fractional part thereof, of the par value of the shares transferred (Section 176 of the Tax Code); that since the DST should have been paid on the day the transaction was perfected in 1984, a 25% surcharge shall be imposed; and that the proposed transfer of the shares from Sun to Sail shall be subject to the documentary stamp tax of P1.00 for every P200 or a fraction thereof, of the par value of the stocks imposed under Section 176 of the Tax Code, as amended by Republic Act No. 7660, are likewise hereby confirmed. Finally, upon presentment of a proof that the documentary stamp tax on the transfers have been paid, the corporate secretary of Federal may cause the registration of the transfer of the shares of stock from Phoenix to Sun and from Sun to Sail in the Stock and Transfer Book of the corporation and cancel and issue new Stock Certificates in the name of the transferee corporations. (BIR Rulings Nos. 355-88 dated July 26, 1988 and 195-90 dated October 9, 1990) Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)