DA ITAD BIR Ruling No. 170-06

December 29, 2006 DA ITAD BIR RULING NO. 170-06 Article 13, Philippines-Netherlands Tax Treaty; BIR Ruling No. DA-ITAD 214-96; BIR Ruling No. DA 326-05; BIR Ruling No. 039-02 Castillo Laman Tan Pantaleon & San Jose Law Offices The Valero Tower, 122 Valero St. Salcedo Village, 1227 Makati City Attention: Atty. Maria Victoria D. Sarmiento Gentlemen : This refers to your application for relief from double taxation on behalf of your client, Eli Lilly Philippines, Inc. (ELP), requesting confirmation of your opinion that: a. ELP's plan to decrease its authorized capital stock is a non-taxable event. ELP is not subject to any tax for receiving from Eli Lilly Nederland B.V. (ELN B.V.) the surrender shares as a result of the partial liquidation, and for canceling/retiring the reduced ELP shares, since it is merely performing the ministerial function of implementing the reduction in capital stock, thus, ELP is not taking title nor does it receive any value for the surrendered shares; and b. Assuming without admitting that the surrender by ELN B.V. of its shares of stock would fall under what constitutes a sale of movable property, the said transaction will be solely taxable in Netherlands, in accordance with the Philippines-Netherlands tax treaty. It is represented that ELN B.V. nonresident foreign corporation duly organized and existing under the laws of Netherlands with office address at Krijtwal 17-23, 3431, HA Nieuwegein, Netherlands; that it is not licensed to do business in the Philippines as evidenced by a certification issued by the Securities and Exchange Commission dated October 24, 2005; that ELP is a corporation organized and existing under the laws of the Philippines with office address at 32/F Wynsum Corporate Plaza 22 Emerald Avenue, Ortigas Center, Pasig City. It is further represented that as of August 16, 2005, ELN B.V. owns a 103,353,050 shares of stock of ELP with a par value of P10.00 as evidenced by Secretary's Certificate notarized February 1, 2006; that on August 16, 2005, the Board of Directors of ELP unanimously approved the following resolution: DHESca a. decrease the Authorized Capital Stock (ACS) of ELP by P500,000,000.00; b. to amend Article VII of the amended articles of incorporation of ELP to effectuate the decrease of ACS; and c. to reduce the subscribed and paid-up capital stock of ELP from One Billion Thirty Three Million Five Hundred Thirty Thousand Five Hundred Pesos (P1,033,530,500.00) divided into One hundred Three Million Three Hundred Fifty Three Thousand Fifty Shares (103,353,050) shares with a par value of Ten Pesos (P10.00) per shares to Five Hundred Thirty Three Million Five Hundred Thirty Thousand Five Hundred Pesos (P533,330,500.00) divided into Fifty Three Million Three Hundred Fifty Three Thousand Fifty (53,353,050) shares with a par value of P10.00 per share, with the amount of Five Hundred Million Pesos (P500,000,000,00) to be returned in cash to ELN B.V. as a partial return of its capital investment; and d. to authorize the Directors and proper officers of the ELP to expedite, file and submit such documents and to do all acts or things as may be necessary to fully implement the decrease of the ACS; that said decrease in capital stock was duly approved by the SEC on November 11, 2005; that in consideration of the surrender of the said shares by ELN B.V. and the cancellation of shares corresponding to the decrease of the ELP's subscribed and paid up capital in the amount of Five hundred Million (P500,000,000.00) par value worth of shares, ELP will return to ELN B.V. the amount of P500,000,000.00, as partial return of its capital investment; that the decrease in the ACS corresponds to 50,000,000 shares of par value of P10.00 per share will be considered as retired. In reply, please be informed that ELP is not subject to any tax on the surrender of ELN B.V.'s shares in ELP due to the latter's reduction of its subscribed capital stock, since they are merely performing a ministerial function required under the law to carry out the reduction of the capital stock and therefore are not taking title to and do not represent value, since they are merely the documentary evidence of the reduced capital stock and will cease to exist after their cancellation. ( BIR Ruling No. DA-214-96 dated June 26, 1996 ) However, any gain or losses that may be sustained by ELN B.V. upon the surrender of its shares, for the amount of value to be received in exchange, in the instant case, the net gain or income will be subjected to Philippine income taxes. (BIR Ruling Nos. 119-84, 322-87, 136-88, 171-92, and UN248-94). Therefore, gain is to be treated in the same manner as a gain from the sale or exchange of shares, consistent with the decision of the Supreme Court in Wise & Co., Inc., and as such is subject to the ordinary income tax rates provided under Sections 24(A)(1), 25(A)(1) and (B) [that is, the 25% rate], 27(A) or (E), 28(A)(1) or (2) and (B)(1) of the Tax Code of 1997, depending on the status of the shareholder/stockholder (for instance, whether the shareholder is a corporation or an individual, resident or non-resident). (BIR Ruling No. 39-02 dated November 11, 2002) Since the shareholder is a resident of the Netherlands, Article 13 of the Philippines-Netherlands will apply. It provides: "Article 13 GAINS FROM THE ALIENATION OF PROPERTY 1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the State in which such property is situated. DHEcCT 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of one of the States has in the other State, or of movable property pertaining to a fixed base available to a resident of one of the States in the other 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. 3. Notwithstanding the provisions of paragraph 2, gains derived by an enterprise of one of the States from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships or aircraft shall be taxable only in that State. 4. Gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3, shall be taxable only in the State where the alienator is a resident. 5. The provisions of paragraph 4 shall not affect the right of each of the States to levy according to its domestic law a tax on gains from the alienation of any property derived by an individual who is a resident of the other State and has been a resident of the first-mentioned State at any time during the six years immediately preceding the alienation of the property." It is clear from the aforequoted provisions of the Philippines-Netherlands tax treaty that capital gains from the alienation of any property, other than mentioned in paragraphs 1, 2 and 3 of Article 13 of the tax treaty shall be taxable only in the State where the alienator is a resident. Considering that the surrender of shares of stock is not among those mentioned in said paragraphs 1, 2 and 3 of Article 13 of the Philippines-Netherlands tax treaty, any gain that may be derived by ELN B.V. from the surrender of its shares of stock to ELP, which is a resident of the Netherlands, shall not be subject to Philippine income tax under Section 28(A)(7)(c) of the Tax Code of 1997, but shall be subject to tax only in the Netherlands. In the instant case, the surrender of the certificates of stock by the stockholders of ELP is a necessary consequence of the decrease in the capital stock of the said corporation. Thus, in order to reflect the corrected number of shares therein, it is required that the stockholders of record should transfer and surrender their old certificates of stock to the corporation, without any monetary consideration, but only for the purpose of replacing the old stock certificates into new ones. In other words, there is no effective transfer of beneficial ownership over the said shares. Such being the case, the replacement of stock certificates is not subject to the documentary stamp tax prescribed in Section 176 of the Tax Code, as amended. Accordingly, the issuance of new shares of stocks, to replace the previously issued and outstanding shares of stocks of ELP pursuant to a decrease in its capital stock is exempt from the payment of documentary stamp tax. ( BIR Ruling DA-326-05 dated July 22, 2005 ) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. HEDSIc (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service