Isla Lipana & Co.

July 12, 2018 ITAD BIR RULING NO. 074-18 Article 13 (Capital Gains) Philippines- Spain tax treaty Isla Lipana & Co. 29th Floor, Philam Life Tower 8767 Paseo de Roxas 1226 Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on January 4, 2017 requesting confirmation that gains derived by Mapfre Internacional S.A. (" Mapfre Internacional ") (formerly, Mundial de Inversiones S.A. ) from the transfer of its shares of stock in Mapfre Insular Insurance Corporation (" Mapfre PH ") to Mapfre America S.A. (" Mapfre America ") are exempt from capital gains 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 "). HTcADC It is represented that Mapfre Internacional is a corporation organized and existing under the laws of Spain and a resident thereof based on the Certificate issued by the Mercantile Registry of Madrid and the Certificate of Residence issued by the Agencia Tributaria of Spain; that Mapfre Internacional is engaged in acquiring, selling, holding and operating movable and immovable assets situated abroad; that Mapfre Internacional 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 Mapfre America is also a corporation organized and existing under the laws of Spain engaged in acquiring, selling, holding and operating movable and immovable assets situated abroad; that Mapfre Internacional and Mapfre America are wholly-owned subsidiaries of Mapfre S.A. , also a corporation organized and existing under the laws of Spain; that, on the other hand, Mapfre PH is a domestic corporation engaged in providing motor car, fire, marine, fidelity, and surety insurance, and other types of non-life insurance, based on its Audited Financial Statements as of December 31, 2015; that Mapfre PH is owned 74.94% by Mapfre Internacional and 24.99% by Insular Life Assurance Company Ltd., a domestic corporation; and that based on Mapfre PH 's General Information Sheet as of September 29, 2016 and Corporate Secretary's Certificate, Mapfre Internacional holds 7,493,843 common shares in Mapfre PH , each share with a par value of P_____ or total par value of P__________. It is further represented that on April 21, 2016, Mapfre Internacional and Mapfre America entered into a Deed of Company Merger by Absorption (" Deed of Merger ") where both companies had merged with the absorption of Mapfre Internacional by Mapfre America , and dissolution without liquidation of Mapfre Internacional and redemption of all its shares representing its share capital; that as a result thereof, Mapfre Internacional 's assets had been transferred to Mapfre America , and the latter had acquired by universal succession all assets, rights and obligations of Mapfre Internacional ; that the merger is carried out to restructure and streamline the businesses of both companies; that Mapfre America shall change its name to Mapfre Internacional S.A. (the " New Mapfre Internacional "); that under the name Mapfre Internacional S.A. , a company has been incorporated which shall be governed by bylaws contained in the Deed of Merger and applicable regulations on corporations; that the New Mapfre Internacional has full legal and acting capacity, and may acquire, hold and dispose of, under any title, any assets, rights and securities and participate in the formation of all kinds of companies; that there are no industrial contributions or accessory benefits to the companies participating in the merger; and that pursuant to the merger, the 7,493,843 common shares in Mapfre PH were transferred to Mapfre America , and, consequently, to the New Mapfre Internacional . It is finally represented that as of December 31, 2015, the ratio of real property over the total assets of Mapfre PH is 5.94%. In reply, please be informed that under the Deed of Merger, there are no industrial contributions or accessory benefits to the companies participating in the merger; hence, this transaction will not result in any compensation, and subsequently, any capital gains, to Mapfre Internacional or its stockholders. However, assuming there is compensation, relief is provided under paragraph 4, Article 13 (Capital Gains) of the Philippines-Spain tax treaty, to wit: "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 4, 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, 1 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 domestic 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) As of December 31, 2015, Mapfre PH's RPI is 5.94%, which is not more than 50%. Hence, under paragraph 4, Article 13 of the Philippines-Spain tax treaty, any resulting gains derived by Mapfre International are exempt from capital gains tax imposed under Section 28 (B) (5) (c) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), which provides: " 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%" Moreover, where no compensation is paid to Mapfre Internacional , the transfer of its shares in Mapfre PH to Mapfre America constitutes a donation subject to donor's tax of 30% under Sections 98 and 99 of the Tax Code: " SEC. 98. Imposition of Tax. (A) There shall be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property by gift, a tax, computed as provided in Section 99. (B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. aScITE SEC. 99. Rates of Tax Payable by Donor. xxx xxx xxx (B) Tax Payable by Donor if Donee is a Stranger. When the donee or beneficiary is stranger, the tax payable by the donor shall be thirty percent (30%) of the net gifts. . ." The rate of 30% is clarified under Section 10 (B) of Revenue Regulations No. 2-2003, 2 to wit: " 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) Finally, under Section 175 of the Tax Code, said transfer 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." 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. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties. 2. 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.