Isla Lipana and Co.

January 30, 2018 ITAD BIR RULING NO. 008-18 Article 13 (Capital Gains) Philippines- Korea tax treaty Isla Lipana and Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on October 2, 2015 requesting confirmation that capital gains derived by Samsung C&T Corporation (" Samsung ") from the transfer of its shares of stock in Starworld Corporation (" Starworld ") to Cheil Industries, Inc. (" Cheil ") are exempt from capital gains tax pursuant to the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Korea tax treaty "). cHDAIS FACTS Samsung is a foreign corporation organized and existing under the laws of Korea and a resident thereof based on its amended Articles of Incorporation and Certificate of Residence issued by the National Tax Service of Korea. 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 (" SEC "). Based on its Audited Financial Statements (" AFS ") as of December 31, 2014, Samsung is engaged in the construction and trading business in global markets. Cheil is also a foreign corporation organized and existing under the laws of Korea. It is also not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the SEC. On May 26, 2015, Samsung and Cheil entered into a Merger Agreement with Samsung as the company ceasing to exist and Cheil as the surviving company. The merger will combine the diverse business portfolio and operational expertise of Cheil with the leading market position of Samsung in the construction industry as well as its global infrastructure in the trading business to solidify the foundation for the combined companies' growth into a top tier global company by developing new business opportunities. After the merger, Cheil , the surviving company, will be named as Samsung C&T Corporation . Cheil will assume all assets, liabilities, rights and obligations of Samsung as of September 1, 2015. In consideration, Cheil shall issue 56,317,483 shares to the shareholders of Samsung consisting of 54,690,043 common and 1,627,440 preferred shares. Each share has a par value of _____ Korean won (" KW ") or a total of KW__________. Based on Starworld 's General Information Sheet (" GIS ") and Secretary's Certificate, Samsung owns 2,119,998 common shares of Starworld , each share with a par value of P_____ or a total of P__________. This accounts for 39.99% ownership in the company. Based on Starworld 's GIS and AFS as of October 31, 2014, Starworld is engaged in real estate property development and marketing of the Calamba Premier International Park. Based on Samsung 's AFS as of December 31, 2014, it has a net book value or fair market value (total assets minus total liabilities) amounting to KW__________. In the Investments in Subsidiaries, Associates and Joint Ventures section of the AFS, the shares in Starworld held by Samsung has a net value of KW__________ which account for 0.0471781% of the assets of Samsung . Multiplying this to the par value of shares issued by Cheil to Samsung amounting to KW__________, the consideration given by Cheil to Samsung in exchange for the transferred Starworld shares has an amount of KW__________ or P__________. 1 Based on Starworld 's AFS as of October 31, 2014, the ratio of real property over its total assets is 3.61%. As of that date, the fair market value (" FMV ") of the 2,119,998 shares in Starworld transferred by Samsung to Cheil is __________, which is greater than the consideration for such shares. RULING A. Income tax In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), capital gains from the disposition of unlisted shares of a domestic corporation and derived by a foreign corporation not engaged in trade or business are subject to income tax at the rate of 5 or 10 percent, 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 if required under any treaty obligation binding upon the Philippines, thus: ISHCcT " 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 4, Article 13 (Capital Gains) of the Philippines-Korea tax treaty provides: "4. Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Gains from the alienation of interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State." Under paragraph 3, gains from the alienation of shares of a domestic company, the property of which consists principally of immovable property situated in the Philippines, may be taxed in the Philippines. Relative thereto, under Section 2 (b) of Revenue Regulations No. 4-86, 2 the term consisting principally of real or immovable property means that the ratio of real or immovable property over the total assets (" real property interest " or " RPI ") of the corporation is more than 50 percent , to wit: " SECTION 2. Definitions. For purposes of these regulations, the following terms and phrases shall be understood to mean b) 'Principally,' 'wholly or principally,' 'directly principally' or 'attributable' more than fifty percent of the entire assets in terms of value ;" (Emphasis ours) Accordingly, since Starworld 's RPI as of October 31, 2014 is 3.61%, which is not more than 50%, any capital gains derived by Samsung from the transfer of its shares in Starworld to Cheil are exempt from income tax pursuant to paragraph 4, Article 13 of the Philippines-Korea tax treaty. B. Donor's tax As mentioned above, the FMV (P__________) of the Starworld shares is greater than the consideration (P__________) received for those shares. This being the case, the excess is subject to donor's tax under Section 100 of the Tax Code and Section 7 (c.1.4) of Revenue Regulations No. 6-2008, 3 which provide: " 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." " SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A LOCAL STOCK EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(4)(7)(c), 28(B)(5)(c) OF THE TAX CODE, AS AMENDED . xxx xxx xxx (c) Determination of Amount and Recognition of Gain or Loss. (c.1) Determination of Selling Price . In determining the selling price, the following rules shall apply: xxx xxx xxx (c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater than the amount of money and/or fair market value of the property received, the excess of the fair market value of the shares of stock sold, bartered or exchanged over the amount of money and the fair market value of the property, if any, received as consideration shall be deemed a gift subject to the donor's tax under Sec. 100 of the Tax Code, as amended." Note that Section 100 and Section 7 (c.1.4) treat as deemed gift (and not as actual donation) the difference between the higher fair market value of the shares of stock transferred and the lower consideration for such shares. The elements of donation are reiterated by the Supreme Court 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 , as follows: (1) reduction in the patrimony or property of the donor, (2) increase in the patrimony or property of the donee, and (3) intent on the part of the donor to do an act of liberality or generosity. Under Section 100, the fact that consideration is involved negates already the third element of donation, which is, liberality or generosity on the donor's part. Nonetheless, Section 100 applies to transfer of shares for less than adequate and full consideration regardless of the purpose underlying the transfer. CAacTH C. Documentary stamp tax Finally, the transfer of Starworld shares is subject to documentary stamp tax under Section 175 of the Tax Code below: " 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." 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. BSP exchange rate as of March 26, 2015: KW1 = P0.040700 (See http://www.bsp.gov.ph/dbank_reports/ExchangeRates_2.asp ) 2. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties. 3. Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets.