Isla Lipana and Co.

March 11, 2020 ITAD BIR RULING NO. 028-20 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 any gains derived by Samsung C&T Corporation ("Samsung C&T") from the transfer of its shares of stock in Laguna International Industrial Park, Inc. ("Laguna Park") to Cheil Industries, Inc. ("Cheil") are exempt from income 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") . FACTS: It is represented that Samsung C&T 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; that Samsung C&T is engaged in various activities including engineering, construction and supervision of civil and architectural pavement, installation of steel material, and electrical facilities; harbor and dredging; reclamation; landscaping; electric and telecommunication; firefighting activities; mechanical facilities; gas and special heating facilities; cultural assets protection services, disposal facilities of general and industrial waste; and facilities controlling water, air and noise pollution; that Samsung C&T 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; that Cheil is also a foreign corporation organized and existing under the laws of Korea; that Cheil manufactures and sells chemicals and electronic materials such as flame-retardant materials, scratch-resistant resins, and sheet resins for use in televisions, monitors, devices, automobiles, refrigerators, mobile phones, and laptops; 1 that, on the other hand, Laguna Park is a domestic corporation organized and existing under the laws of the Philippines, whose primary purpose is to develop and operate industrial estates and other real estate properties; and that Samsung C&T owns 39,998 preferred shares of Laguna Park , each share with a par value of Php______ or total par value of Php__________, which represents 39.98% ownership in Laguna Park . It is also represented that on May 26, 2015, Samsung C&T and Cheil entered into a Merger Agreement where Samsung C&T is the absorbed entity and Cheil is the surviving entity; that the merger will combine Cheil 's diverse business portfolio and operational expertise and Samsung C&T 's leading market position in the construction industry and its global infrastructure in the trading business, and will solidify the foundation of the combined entities' growth into a top tier global company; that the merger will take effect on September 1, 2015; that after the merger, Cheil will be named as 'Samsung C&T Corporation' and will assume all Samsung C&T 's assets, liabilities, rights and obligations as of September 1, 2015; that, in consideration, Cheil will issue 56,317,483 new shares to Samsung C&T 's shareholders consisting of 54,690,043 common and 1,627,440 preferred shares, each share with par value of ______ KW (Korean won), or total par value of _________________ KW; and that Cheil 's capital will increase by ________________ KW and will total ____________________ KW. ASEcHI It is further represented that the merger combined Samsung C&T 's and Cheil 's respective reputations as leaders in their industries, where both aim to become a global business partner and lifestyle innovator through their respective group of companies in engineering and construction, trading and investment, fashion, and resort development. 2 It is further represented based on Samsung C&T 's Audited Financial Statements (AFS) as of December 31, 2014 that, prior to the merger, the Investments in Subsidiaries and Associates section of Samsung C&T did not include therein those shares in Laguna Park ; that based on Samsung C&T 's letter dated July 19, 2016, the reason therefor is that Samsung C&T has approximately 200 subsidiaries and associates worldwide, and the net book value of such shares is not significant to be reported in the AFS as assets; and that based on Laguna Park 's AFS as of October 31, 2014, it had net capital deficiency amounting to Php _______________ . It is further represented based on Laguna Park 's AFS as of October 31, 2014, prior to the effectivity of the merger, that the company's real property interest is 55.14%, as shown below: Real property interest = Real property (Php ________ ) Total assets (Php ________ ) = 55.14% Real property consisted of land and land development costs (Php _________ ) and refundable deposits (Php ________ ). Under Revenue Regulations No. 4-86 (RR No. 4-86), 3 capital gains derived by residents of countries with existing tax treaties with the Philippines from the disposition of shares in a domestic corporation or interest in a domestic partnership are taxable in the Philippines if the assets of the corporation or partnership consist principally of real property (real property interest), i.e. , more than fifty percent (50%) of the entire assets, thus: " 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." It is finally represented based on a sworn statement issued by Laguna Park that 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 proceedings, or judicial appeal. ITAaHc RULING: A. Income 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 in the Philippines from the disposition of shares in a domestic corporation not through a stock exchange are subject to income 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 4, Article 13 of the Philippines-Korea tax treaty provides relief as follows: "Article 13 CAPITAL GAINS xxx xxx xxx 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." CHTAIc Under Article 13, gains from the alienation of shares of a domestic company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Since Laguna Park 's real property interest is 55.14%, its assets consist principally of real property under Section 2 (b) of RR No. 4-86. This being the case, any gains derived by Samsung C&T from the transfer of its shares in Laguna Park to Cheil pursuant to the said merger are taxable in the Philippines under paragraph 4, Article 13 of the Philippines-Korea tax treaty, and particularly, under Section 28 (B) (5) (c) of the Tax Code. 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." Section 100 does not apply in the instant case since prior to the effectivity of the merger, Laguna Park had a net capital deficit. However, assuming that Laguna Park was not in deficit at that time, and the new shares issued by Cheil to Samsung C&T in consideration for such shares in Laguna Park were below the fair market of those shares, this situation also does not give rise to donor's tax because the transfer was a result of a merger and not for Samsung C&T (or its ultimate parent) to relinquish ownership of its assets including those shares in Laguna Park . 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. In the subject merger, before and after the merger, Samsung C&T (or its ultimate parent) owns and will continue to own all its assets transferred to Cheil including those shares in Laguna Park . 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 Samsung C&T of its assets to Cheil was carried out for purely business reasons and not motivated by any donative intent on the part of Samsung C&T . EATCcI 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 any 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 Under Section 175 of the Tax Code, the transfer of shares in Laguna Park is subject to documentary stamp tax 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 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. DHITCc Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=879759 2. http://www.samsungcnt.com/eng/overview/info.do 3. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties.