Isla Lipana & Co.

March 11, 2020 ITAD BIR RULING NO. 030-20 Article 13 (Capital Gains) Philippines-Spain tax treaty Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on October 14, 2016 requesting confirmation that capital gains derived by Amadeus IT Group, S.A. ("Amadeus") from the transfer of its shares of stock in Amadeus Marketing Philippines, Inc. ("Amadeus Philippines") and Navitaire Philippines, Inc. ("Navitaire Philippines") to Amadeus IT Holding, S.A. ("Amadeus Holding") are exempt from income tax pursuant to the Convention between the Republic of the Philippines and Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Spain tax treaty") . FACTS Amadeus is a corporation organized and existing under the laws of Spain and a resident thereof based on the Certification issued by the Trade Registrar of Spain and Certificate of Residence issued by the Tax Authorities of Spain. Amadeus , together with subsidiaries, operates as a transaction processor for the travel and tourism industry worldwide operating through its distribution segments and information technology solutions segment. It acts as an international network providing real-time search, pricing, booking, and ticketing services, and offers a portfolio of technology solutions to travel providers, which automate certain mission-critical business processes and strategic operations, such as sales, reservation, inventory management, and other operational processes. 1 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. Amadeus Holding is also a corporation organized and existing under the laws of Spain. Its corporate objects include, among others, the transfer of data from or through a computer reservation system, and offering reservations, tariffs, transport tickets, and information technology services, relating to the transport and tourism industry. Amadeus Holding is the ultimate parent of Amadeus . 2 SaCIDT On the other hand, Amadeus Philippines and Navitaire Philippines are domestic corporations. Based on Amadeus Philippines ' Audited Financial Statements ("AFS") as of December 31, 2015, General Information Sheet ("GIS") as of June 6, 2016, and Corporate Secretary's Certificate, Amadeus Philippines ' primary purpose is to market, promote and distribute the Amadeus System to local users, particularly, travel agencies. Amadeus holds 1,327,533 common shares of Amadeus Philippines , thereby accounting for 99.99% ownership in the latter. Similarly, based on Navitaire Philippines ' AFS as of August 31, 2015, GIS as of August 5, 2016, and Corporate Secretary's Certificate, Navitaire Philippines ' primary purpose is to operate, manage, license, and develop technology and services related to access and distribution of airline and other modes of travel products and inventory. Navitaire Philippines is also a wholly-owned subsidiary of Amadeus whereby the latter holds 139,499,995 common shares of the former, thereby accounting for 99.99% ownership. On August 1, 2016, Amadeus (the "Absorbed Company" ) and Amadeus Holding (the "Absorbing Company" ) entered into a Deed of Merger under the following terms and conditions: a) The integration of Amadeus into Amadeus Holding by means of block transfer of the former's assets and liabilities to the latter (which acquires them by universal succession), cessation of Amadeus ' existence without liquidation and allotment of Amadeus Holding 's shares to Amadeus' shareholders. b) The change of the Absorbing Company's name, ' Amadeus IT Holding, S.A. ,' to the Absorbed Company's name, ' Amadeus IT Group, S.A. ,' effective on the registration of the merger with the Madrid Commercial Registry. As a result, Amadeus ' shares in Amadeus Philippines and Navitaire Philippines were effectively transferred to Amadeus Holding . Based on Amadeus Philippines ' AFS, its real property interest as of December 31, 2015 is 10.89%, as computed below: Real property interest = Real property (Php__________) Total assets (Php__________) = 10.89%. Real property consists of property and equipment (Php__________), refundable deposits (Php__________) and prepaid rent (Php__________). On the other hand, Navitaire does not have any real property as of August 31, 2015. Finally, based on the respective sworn statements issued by Amadeus Philippines and Navitaire , 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. cHECAS 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 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 3, Article 13 of the Philippines-Spain tax treaty provides that gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in the Philippines, may be taxed therein, to wit: "Article 13 CAPITAL GAINS xxx xxx xxx 3. 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 Revenue Regulations 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 of interest in a domestic partnership are taxable in the Philippines if the corporation's or partnership's assets 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." Accordingly, since Amadeus Philippines ' and Navitaire 's real property interests prior to the transfer of their shares from Amadeus to Amadeus Holding are only 10.89% and 0%, respectively, their assets do not consist principally of immovable property under Section 2 of Revenue Regulations No. 4-86. This being so, capital gains derived by Amadeus from the transfer of such shares to Amadeus Holding are exempt from income tax pursuant to paragraph 3, Article 13 of the Philippines-Spain tax treaty. cAaDHT B. Donor's tax Under Section 100 of the Tax Code, where property (other than real property) is transferred for less than 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 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." Under the merger, the transfer of Amadeus ' assets to Amadeus Holding did not result in the liquidation of Amadeus but in the allotment of Amadeus Holding 's shares to Amadeus ' shareholders. The non-payment of consideration (monetary or otherwise) to Amadeus ' shareholders does not give rise to the imposition of donor's tax. This is because the use of the term fair market value ("FMV") in Section 100 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 ownership of its property. Hence, if the consideration received or demanded by the seller is below the FMV of the sold property, or if no consideration was paid at all, the deficit is characterized as a gift subject to donor's tax. However, in the instant case, Amadeus Holding being the ultimate parent of Amadeus , consequently owns Amadeus ' assets including those shares in Amadeus Philippines and Navitaire . Thus, before and after the transfer, Amadeus Holding remains to be the beneficial owner of the shares thereby making such transfer exempt from donor's tax. C. Documentary stamp tax Finally, under Section 175 of the Tax Code, the said transfer of shares is subject to documentary stamp tax, 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. HCaDIS Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=883733 2. https://corporate.amadeus.com/en/about-us 3. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties.