Sycip Gorres Velayo & Company

March 5, 2018 ITAD BIR RULING NO. 022-18 Article 13, Philippines- Netherlands tax treaty Sycip Gorres Velayo & Company 6760 Ayala Avenue 1226 Makati City Attention: AAA Gentlemen : This refers to your tax treaty relief application dated October 24, 2014, on behalf of your client, Celestica Netherlands B.V. ("CNBV"), requesting confirmation of your opinion that any gains derived by CNBV from the surrender of its shares of stock in Celestica, Philippines, Inc. ("CPI"), is exempt from income tax and capital gains tax, pursuant to the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands Tax Treaty"). CaSAcH FACTS CNBV is a resident of the Netherlands within the meaning of Article 4 of Philippines-Netherlands Tax Treaty as shown in the Declaration of Residence issued by the Tax Authorities Administration Office on 03 December 2013. Furthermore, CNBV is not registered as a corporation or as a partnership in the Philippines, as shown in the Certificate of Non-Registration of Corporation issued by the SEC on January 9, 2014. CPI is a corporation duly organized and existing under the laws of the Philippines pursuant to its Amended Articles of Incorporation ("AOI"), approved by the Securities and Exchange Commission ("SEC") on March 25, 2004; CPI's primary purpose of business is: "to engage in, operate, conduct and maintain the business of researching, studying, designing, developing, processing, manufacturing, assembling, installing, constructing, testing, modifying, repairing, debugging, tuning, maintaining, packaging, importing, exporting, holding, owning, warehousing, storing, managing, operating, buying, purchasing or otherwise acquiring, investing, selling (on wholesale within the Philippines), supplying, distributing, marketing, leasing, renting, mortgaging, pledging, assigning, transferring, exchanging or otherwise disposing of, transforming, or otherwise trading or dealing in transmission equipment, its associated equipment, any other telecommunications equipment and systems of all classes and descriptions, and any other electric or electronic equipment and systems, and any and all sub-assemblies, units, components and parts relating to such equipment and systems (including both hardware and software)." CPI also has an investment in the shares of stock of Celestica Laguna, Inc., a domestic corporation. CNBV is the registered and beneficial owner of the Three Hundred Eighty-Eight Thousand Seven Hundred Ninety (388,790) common shares of stock in CPI with a par value of P_____ per share for a total par value of P ___________ . As part of a proposed reorganization, CPI will permanently cease business operations in the Philippines. On March 31, 2011, CPI's Board of Directors approved the shortening of the corporate term of the corporation, up to December 31, 2013 or upon the date of the SEC approval of its application for shortening of its corporate term, as the case may be. Upon CPI's dissolution, CNBV will surrender all its CPI shares, and the remaining net assets of CPI (if any) will be remitted to CNBV. RULING In reply, please be informed that capital gains derived by a nonresident are subject to tax under Section 28 (B) (5) (c) of 1997 National Internal Revenue Code (Tax Code), as amended, 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. (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, such fees may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the Code provides: "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." IaHDcT With respect to a treaty, you invoked the Philippines-Netherlands tax treaty, to wit: "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. (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 of which the alienator is a resident. . . . " Based on the foregoing, capital gains realized from alienation of properties other than those mentioned in paragraphs 1, 2 and 3 above are taxable only in the state where the alienator is a resident. Since the shares of stock of CPI being surrendered by CNBV are not among those mentioned in paragraphs 1, 2 and 3 of Article 13 above, then the capital gains 1 derived by CNBV, a resident solely of the Netherlands, from the surrender of its shares of stock in CPI, a domestic corporation, are exempt from Philippine income tax and CGT pursuant to Paragraph 4, Article 13 of the RP-Netherlands Tax Treaty. However, in addition to the foregoing, this Office takes cognizance of the commentaries of the ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD) Committee on Fiscal Affairs on the Model Tax Convention Paragraphs 5, Commentary on Article 13 (Capital Gains), Model Tax Convention on Income and Capital, 15 July 2014, which states that: "If shares are alienated by a shareholder in connection with the liquidation of the issuing company or the redemption of shares or reduction of paid-up capital of that company, the difference between the proceeds obtained by the shareholder and the par value of the shares may be treated in the State if which the company is a resident as a distribution of accumulated profits and not as a capital gain. The Article does not prevent the State of residence of the company from taxing such distributions at the rates provided for in Article 10: such taxation is permitted because such difference is covered by the definition of the term "dividends" contained in paragraph 3 of Article 10 and interpreted in paragraph 28 of the Commentary relating thereto, to the extent that the domestic law of that State treats that difference as income from shares." In the instant case, Revenue Regulations No. 006-08 dated April 22, 2008 (RR 06-08) provides that the gains derived by a shareholder from the surrender of its shares upon the dissolution of a company, in exchange for the net assets of the company in liquidation are capital gains, and the capital gain is the difference between the net assets received by the shareholder and the shareholder's cost basis in the shares. Although such gains are capital gains, they are nevertheless subject to regular corporate income tax, viz. : "SECTION 8. Taxation of Surrender of Shares by the Investor Upon Dissolution of the Corporation and Liquidation of Assets and Liabilities of Said Corporation. Upon surrender by the investor of the shares in exchange for cash and property distributed by the issuing corporation upon its dissolution and liquidation of all assets and liabilities, the investor shall recognize either capital gain or capital loss upon such surrender of shares computed by comparing the cash and fair market value of property received against the cost of the investment in shares. The difference between the sum of the cash and the fair market value of property received and the cost of the investment in shares shall represent the capital gain or capital loss from the investment, whichever is applicable . If the investor is an individual, the rule on holding period shall apply and the percentage of taxable capital gain or deductible capital loss shall depend on the number of months or years the shares are held by the investor. Section 39 of the Tax Code, as amended, shall herein apply in all possible situations. The capital gain or loss derived therefrom shall be subject to regular income tax rates imposed under the Tax Code, as amended, on individual taxpayers or to the corporate income tax rate, in case of corporations." The rationale for the above-quoted provision of RR No. 06-08 is found in the case of Wise & Co. vs. Bibiano L. Meer, G.R. No. 48231, dated June 30, 1947 to wit: "2. The second assignment of error. In disposing of the first assignment of error, we held that the distribution in the instant case were not ordinary dividends but payments for surrendered or relinquished stock in a corporation in complete liquidation, sometimes called liquidating dividends. The question is whether such amounts were taxable income. The Income Tax Law, Act No. 2833, section 25 (a), as amended by section 4 of Act No. 3761, inter alia stipulated: Where a corporation, partnership, association, joint account, or insurance company distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporation, is a taxable income or a deductible loss as the case may be . Partial source of the forgoing provision was section 201 (c) of the U.S. Revenue Act of 1918, approved February 24, 1919, providing: "Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for the stock or share, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits." xxx xxx xxx It should be borne in mind that plaintiffs received the distributions in question in exchange for the surrender and relinquishment by them of their stock in the Hong Kong Company which was dissolved and in process of complete liquidation. That money in the hands of the corporation formed a part of its income and was properly taxable to it under the then existing Income Tax Law. When the corporation was dissolved and in process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took place, which was no different in its essence from a sale of the same stock to a third party who paid therefor . In either case the shareholder who received the consideration for the stock earned that much money as income of his own, which again was properly taxable to him under the same Income Tax Law." Based on the foregoing, this Office is of the opinion and so holds that any gain that may be realized as a result of distributing its liquidating dividends to its stockholders is not subject to the capital gains tax, pursuant to the Philippines-Netherlands tax treaty. DEIHAa Moreover, the surrender of stock certificates is not subject to the documentary stamp tax prescribed in Section 176 of the Tax Code, as amended, since there is no effective transfer of beneficial ownership over the said shares, and CNBV will surrender their old certificates of stock to the corporation as a result of the liquidation. This ruling is issued on the basis of 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, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Note from the Publisher: Copied verbatim from the official document. Missing Footnote Text.