R.G. Manabat and Co.

January 11, 2019 ITAD BIR RULING NO. 002-19 Article 13 (Capital Gains) Philippines- Germany tax treaty R.G. Manabat and Co. 9th Floor, the KPMG Center 6787 Ayala Avenue 1226 Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on April 7, 2017 requesting confirmation that gains derived by DB Mobility Logistics AG (" DB Mobility ") from the transfer of its shares of stock in DB Schenker Global Services Asia Pacific, Inc. (" DB Schenker ") to Deutsche Bahn Aktiengesellschaft (" Deutsche Bahn ") are exempt from income tax pursuant to the renegotiated Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital (" Philippines-Germany tax treaty "),which took effect on January 1, 2016 . FACTS DB Mobility is a foreign corporation organized and existing under the laws of Germany and a resident thereof based on its Articles of Association and Certificate of Residence issued by the German Tax Administration. DB Mobility is engaged in providing transport services for moving goods and passengers, particularly rail transport; logistics services, particularly transport, shipping, freight and storage services; and consultations and services in the areas of transport, logistics, information technology, and telecommunications. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. Deutsche Bahn is also a foreign corporation organized and existing under the laws of Germany and engaged in railways transport. Deutsche Bahn is a joint stock company founded in January 1994, which took over the operations of the two state-run railways in Germany, Bundesbahn and Reichsbahn. On the other hand, DB Schenker is a domestic corporation engaged in providing support services and activities for finance and accounting, reporting, controlling, procurement, treasury, human resource, travel and expenses and payroll and other business process and related services for the Deutsche Bahn Group of Companies, based on its General Information Sheet as of December 16, 2016 and Audited Financial Statements as of December 31, 2016. DB Schenker started its commercial operations on November 1, 2015. Based on the General Information Sheet and Audited Financial Statements and the Corporate Secretary's Certificate, the immediate parent of DB Schenker is DB Mobility ,where it holds 8,995 of the 9,000 outstanding and subscribed common shares of DB Schenker ,accounting for 99.94% ownership of the company. Each share has a par value of 1,000 pesos or total value of 8,995,000 pesos. The ultimate parent of DB Schenker ,and also DB Mobility ,is Deutsche Bahn ,whose shares are owned by the Federal Republic of Germany. On July 15, 2016, DB Mobility and Deutsche Bahn entered into a Merger Agreement by virtue of which DB Mobility ,as transferring entity, intends to transfer its assets as a whole, together with all rights and duties, to Deutsche Bahn ,as acquiring entity, through dissolution without liquidation, by way of merger by absorption, in accordance with Section 2, No. 1 of the Transformation Act of Germany. The transfer retroactively took effect on January 1, 2016. No consideration was provided for the transfer of the assets of DB Mobility to Deutsche Bahn ,and no shares were issued therefor in accordance with Section 5 (1),Nos. 2 to 5 of the Transformation Act. Moreover, the share capital of Deutsche Bahn did not increase as a result of the merger in accordance with Section 68 (1),No. 1 of the Transformation Act. Based on the Corporate Secretary's Certificate, the 9,000 outstanding and subscribed shares of DB Schenker ,consisting of 8,995 shares held by DB Mobility and five shares held by nominee individuals, were transferred to and acquired by Deutsche Bahn .Consequently, Deutsche Bahn now holds 100% ownership of DB Schenker . Based on the Audited Financial Statements, as of December 31, 2015, one day prior to the effectivity of the merger, DB Schenker 's real property interest is 1.19%,as shown below: Real property interest = Real property (Php__________) Total assets (Php __________ ) = 1.19% Real property consisted of refundable deposits (Php__________) and advance rental (Php__________). DB Schenker has not acquired any property and equipment as of that date. Under Revenue Regulations No. 4-86 (RR No. 4-86), 1 capital gains derived by residents of other Contracting States from the disposition of a share or an interest in a Philippine corporation are taxable in the Philippines only if the assets of the corporation consist principally of real property. Section 2 (b) of RR No. 4-86 provides: " SECTION 2. Definitions. For purposes of these regulations, the following terms and phrases shall be understood to mean xxx xxx xxx b) 'Principally,' 'wholly or principally,' 'directly principally' or 'attributable' more than fifty percent of the entire assets in terms of value;" As of December 31, 2015, the fair market value of the 9,000 common shares transferred to Deutsche Bahn is Php__________ as shown below: Fair market value = Percentage of transferred shares (100%) x [total assets (Php ________ ) total liabilities (Php ________ )] = Php __________ . Based on a certification issued by DB Schenker ,the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. RULING A. Income tax In reply, please be informed that under Section 28 (B) (5) (c) of the National Internal Revenue Code of 1997 (" Tax Code "),as amended, capital gains derived by a nonresident foreign corporation from the disposition of shares in a domestic corporation not traded in a stock exchange are subject to capital gains tax at the rate of 5% to 10%,to wit: " SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. xxx xxx xxx (c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange : Not Over P100,000 5% On any amount in excess of P100,000 10%" However, under Section 32 (B) (5) of the Tax Code, such gains are exempt to the extent required by any treaty obligation binding upon the Philippine government, thus: " SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Relative thereto, paragraph 2, Article 13 of the renegotiated Philippines-Germany tax treaty provides that gains from the alienation of shares and similar rights in a company, the assets of which consist, directly, indirectly, or principally of immovable property situated in a Contracting State, may be taxed in that State, thus: " Article 13 CAPITAL GAINS (1) Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State . (2) Gains from the alienation of shares and similar rights in a company, the assets of which consist directly or indirectly principally of immovable property situated in a Contracting State, may be taxed in that State." Accordingly, since DB Schenker 's real property interest as of the effectivity of the merger on January 1, 2016 is 1.19% only, the company's assets do not consist principally of immovable property under Section 2 (b) of RR No. 4-86. This being the case, capital gains, if any, derived by DB Mobility from the transfer of all its shares in DB Schenker to Deutsche Bahn are exempt from income tax pursuant to paragraph 2, Article 13 of the renegotiated Philippines-Germany tax treaty. B. Donor's tax Under Section 100 of the Tax Code, where property (other than real property) is transferred for less than an adequate and full consideration in money or money's worth, the excess between the higher fair market value of the property and the lower consideration received by the transferor is deemed a gift subject to donor's tax, thus: " SEC. 100. Transfer for Less Than Adequate and Full Consideration. Where property, other than real property referred to in Section 24(D),is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year." As of the effectivity of the merger, the fair market value of all transferred shares of DB Schenker is Php__________, and DB Mobility did not receive any consideration for such shares from Deutsche Bahn .The lack of consideration, or the presence thereof but less than the shares' fair market value, does not give rise to donor's tax because the transfer was a result of a merger and not for DB Mobility (or its ultimate parent) to relinquish ownership of the shares. The use of the term fair market value in the above-mentioned provision presupposes a transfer of property between a knowledgeable, willing, and unpressured buyer and a knowledgeable, willing, and unpressured seller in an open market, with the latter relinquishing its ownership over the property. Hence, if the consideration received or demanded by the seller is below the fair market value of the sold property, the deficit would be characterized a gift subject to donor's tax. However, this is not the case of the subject merger. Under the merger, Deutsche Bahn will not grant any consideration to DB Mobility because the former owns all shares of the latter. Thus, before and after the merger, Deutsche Bahn owns and will continue to own all assets of DB Mobility including those shares in DB Schenker . Moreover, in Republic of the Philippines vs. David Rey Guzman and the Register of Deeds of Bulacan, Meycauayan Branch, G.R. No. 132964, February 18, 2000 ,the Supreme Court held that for a donation to be valid, the following three requisites are necessary: (1) reduction in the property of the donor, (2) increase in the property of the donee, and (3) intent on the part of the donor to do an act of liberality (donative intent).In the case of the subject merger, the transfer by DB Mobility of its assets to Deutsche Bahn was carried out for purely business reasons and not motivated by any donative intent on the part DB Mobility . In light of recent developments introduced under Republic Act No. 10963 ,otherwise known as the Tax Reform for Acceleration and Inclusion (hereinafter referred to as the TRAIN Law ),which took effect on January 1, 2018 , Section 100 of the Tax Code was amended to exempt from the imposition of donor's tax the transfer of property for less than adequate and full consideration, where such transfer is a bona fide transfer, at arm's length, and free from any donative intent ,thus: " SEC. 100. Transfer for Less Than Adequate and Full Consideration. Where property, other than real property referred to in Section 24(D),is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year: Provided, however, That a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is a bona fide, at arm's length, and free from any donative intent),will be considered as made for an adequate and full consideration in money or money's worth ." (Underscoring supplied) C. Documentary stamp tax Finally, under Section 175 of the Tax Code, the transfer of shares in DB Schenker is subject to documentary stamp tax equivalent to P0.75 on every P200.00, or fractional part thereof, of the par value of the shares, to wit: " SEC. 175. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Shares or Certificates of Stock. On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such stock, or to secure the future payment of money, or for the future transfer of any stock, there shall be collected a documentary stamp tax of Seventy-five-centavos (P0.75) on each Two hundred pesos (P200),or fractional part thereof, of the par value of such stock: Provided, That only one tax shall be collected on each sale or transfer of stock from one person to another, regardless of whether or not a certificate of stock is issued, indorsed, or delivered in pursuance of such sale or transfer: and Provided, further, That in the case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of said stock." Beginning January 1, 2018, the documentary stamp tax imposed on transfer of shares or certificate of stock shall now be P1.50 on every P200.00, or fractional part thereof, of the par value of the shares, pursuant to Section 52 of the TRAIN Law. Section 175 of the Tax Code now reads as follows: " SEC. 175. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Shares or Certificates of Stock . On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such stock, or to secure the future payment of money, or for the future transfer of any stock, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each Two hundred pesos (P200),or fractional part thereof, of the par value of such stock. .. " This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties.