ITAD BIR Ruling No. 028-17

October 4, 2017 ITAD BIR RULING NO. 028-17 Article 13 (Gains from the Alienation of Property) Philippines-Netherlands tax treaty ______________________________ ______________________________ ______________________________ ______________________________ Attention: ____________________ ____________________ Gentlemen : This refers to your tax treaty relief application filed on September 26, 2016, on behalf of Corporation 1 (" Corp1 "), requesting confirmation that any gains derived by Corp1 from the transfer of its common shares of stock in Corporation 2 (" Corp2 ") to Corporation 3 (" Corp3 ") are exempt from 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 "). cSEDTC FACTS It is represented that Corp1 is a foreign corporation organized and existing under the laws of the Netherlands and a resident thereof based on its amended Articles of Association and Certificate of Residence issued by the Tax Administration Office of __________ in the Netherlands; that the objects of Corp1 are to incorporate, to participate in any way whatsoever in, to manage, to supervise businesses and companies; to finance businesses and companies; and to borrow, to lend and to raise funds, including the issue of bonds, promissory notes or other securities or evidence of indebtedness as well as to enter into agreements in connection with the aforementioned activities, among others; that Corp1 is not registered as a corporation or partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission; that, on the other hand, Corp2 is a domestic corporation based on its General Information Sheet for 2016 and Corporate Secretary's Certificate and Audited Financial Statements as of December 31, 2015; that the primary purpose of Corp2 is to purchase, subscribe for, or otherwise acquire and own, hold real or personal property of any kind or use, sell, assign, transfer, mortgage, pledge, exchange, develop, or otherwise dispose of such properties; that 40% of the capital stock of Corp2 is owned by Corp1 ; that Corp3 is also a domestic corporation engaged in investment house operations. 1 It is also represented that on August 26, 2016, Corp1 and Corp3 entered into a Deed of Absolute Sale of Shares where Corp1 transferred all its 79,490,003 common shares (including two nominee shares) in Corp2 to Corp3 for consideration of P168,969,297.65; that the shares have a par value of P1.00 each, or total value of P79,490,003.00. It is further represented that as of December 31, 2015, Tierra 's shares have a fair market value (total assets minus total liabilities) of P898,160,153.00; and that, consequently, the 79,490,003 shares transferred to Corp3 have a fair market value of P359,264,061.20, which is greater than the consideration received for those shares by Corp1 . It is finally represented that based on a sworn statement issued by Corp1 , the capital gains subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. RULING Capital gains tax In reply, please be informed that under Section 28 (B) (5) (c) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), capital gains derived by a foreign corporation not engaged in trade or business from the disposition of shares of a domestic corporation not listed in a stock exchange are subject to capital gains tax at the rate of 5% or 10%: " 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 on the Philippine government, thus: SDAaTC " 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." For this purpose, you invoke paragraph 4, Article 13 of the Philippines-Netherlands tax treaty, which 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. 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 a 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." Under paragraph 4, gains from the alienation of any property other than mentioned in paragraphs 1, 2 and 3 of Article 13 shall be taxable only in the contracting state where the alienator is a resident. Paragraph 1 refers to immovable property; paragraph 2 to movable property of a permanent establishment of an enterprise or of a fixed base used by an individual in performing professional services property immovable property; and paragraph 3 to ships and aircraft operated in international traffic. In the instant case, since those shares in Corp2 which were sold by Corp1 to Corp3 are not in the category of property covered by paragraph 1, 2 or 3 of Article 13, gains derived by Corp1 for those shares are taxable only in the Netherlands where Corp1 , the alienator, is a resident, pursuant to paragraph 4, Article 13 of the Philippines-Netherlands tax treaty. This being the case, such gains are exempt from capital gains tax in the Philippines. Donor's tax Although exempt from capital gains tax, the sale of shares in Corp2 are subject to donor's tax considering the fair market value (" FMV ") of those shares is greater than the consideration received therefor. Under Section 100 of the Tax Code, as implemented by Section 7 (c.1.4) of Revenue Regulations No. 6-2008, 2 the excess between the higher fair market value and the lower consideration 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." (Emphasis ours) acEHCD " 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(A)(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." (Emphasis ours) Under Section 10 (B) of Revenue Regulations No. 2-2003, 3 the applicable rate on donation made between business organizations is 30%, where such transaction is considered donation made to a stranger, thus: " SEC 10. RATES OF DONOR'S TAX. xxx xxx xxx (B) Tax payable by the donor if donee is a stranger. When the donee or beneficiary is a stranger, the tax payable by the donor shall be thirty per cent (30%) of the net gifts. xxx xxx xxx Donation made between business organizations and those made between an individual and a business organization shall be considered as donation made to a stranger ." (Emphasis ours) Documentary stamp tax Finally, under Section 175 of the Tax Code, the transfer of those shares in Corp2 is subject to documentary stamp tax equivalent to P0.75 for 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." 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. S DHTEC Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Source: BIR Integrated Tax System. 2. Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets. 3. Consolidated Revenue Regulations on Estate Tax and Donor's Tax Incorporating the Amendments Introduced by Republic Act No. 8424, the Tax Reform Act of 1997.