DA ITAD BIR Ruling No. 086-07

July 20, 2007 DA ITAD BIR RULING NO. 086-07 Article 13, Phil.-Switzerland tax treaty; BIR Ruling No. 060-82 Bernaldo Mirador & Directo Law Offices Unit 1807 Cityland Condominium 10-Tower 1 6815 Ayala Avenue corner H.V. dela Costa Street, Makati City Attention: Perfecto E. Mirador, Jr. Partner Pepito G. Po Legal Manager Gentlemen : This refers to your letter dated July 15, 2004, requesting confirmation of your opinion that the sale/transfer of shares in Wacker Machinery Philippines, Inc. (WMPI) by Interwac Holding AG (Interwac) to Wacker Construction Equipment AG (WCEA) is not subject to the capital gains tax, pursuant to the Philippines-Switzerland tax treaty. It is represented that your client, WMPI, is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines with principal address at Lot 9, Block 7, PEZA Drive, First Cavite Industrial Estate, Bo. Langkaan, Dasmarias, Cavite; that WMPI is duly registered with the Philippine Economic Zone Authority (PEZA) with a pioneer status; that as a PEZA-registered enterprise, WMPI is entitled to the 5% preferential tax regime under Republic Act No. 7916, as amended by Republic Act No. 8748 (PEZA Law); that Interwac is a nonresident foreign company created under the laws of Switzerland, with principal address at CH-8305 Dietlikon, Bahnhofstrasse 3, Switzerland; that Interwac used to wholly own WMPI until it sold/transferred its stockholdings therein, consisting of One Million One Hundred Ninety Nine Thousand Nine Hundred Ninety Five (1,199,995) shares with a par value of P100.00 per share to WCEA, through a Certificate of Transfer of Shares of Stock (Certificate); that the said Certificate was signed by the representative of Interwac on September 29, 2003, while the representative of WCEA signed the same on February 3, 2004; that under the said Certificate, it was stipulated among others, that "(a)ll capital gains, documentary stamp taxes, shall be for the account of the Transferor (i.e., Interwac)"; and that WCEA is a nonresident foreign company created under the laws of Germany sometime in September 2003, with principal address located at D-80809 Munchen, Preussenstrasse 41, Germany. aDSHIC In reply, please be informed that Article 13 of the Philippines-Switzerland tax treaty provides as follows, viz : "Article 13 GAINS FROM THE ALIENATION OF PROPERTY 1. Gains from the alienation of immovable property referred to in Article 6 (Income from 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 independent personal services, including such gains from the alienation of such permanent establishment (alone or with the whole enterprise) or of such fixed base may be taxed in that other State. 3. Gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 4. Gains from the alienation of shares of a company the property of which consist directly principally of immovable property situated in a Contracting State may be taxed in that State. 5. Gains from the alienation of any property, other than that mentioned in paragraphs 1, 2, 3 and 4 shall be taxable only in the Contracting State of which the alienator is a resident." Based on the foregoing, the gains which will be realized by Interwac from the sale or transfer of its shares of stock in WMPI to WCEA shall be taxable only in Switzerland. However, under paragraph 4 of the aforequoted provision, the Philippines may tax the gains derived from the disposition of interest in a corporation if its entire assets consist principally of real property interest located in the Philippines. "Real Property Interest" means interest on properties enumerated in Section 3 of Revenue Regulations No. 4-86 which are not, however, exclusive others that are similarly situated. As used in the treaties and in the Regulations, it shall be understood to include real properties as understood under Philippine Laws. Moreover, "Principally" means more than 50% of the entire assets in terms of value. [Sec. 2 (a) and (b), Revenue Regulations No. 4-86]. CcAESI Verification of the 2003 Audited Financial Statements of WMPI disclosed that its real property interest located in the Philippines is only 20.22% of its total assets, thereby making the assets of WMPI not principally consisted of real property interest located in the Philippines. Accordingly, your opinion that the sale or transfer by Interwac to WCEA of its shares in WMPI is not subject to capital gains tax is hereby confirmed. (ITAD Ruling No. 38-00 dated February 4, 2000) This ruling is issued based on the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service