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October 19, 2018 ITAD BIR RULING NO. 092-18 Article 13 (Capital Gains) Philippines- Korea tax treaty AAA _______________ Dear AAA : This refers to your tax treaty relief application filed on March 30, 2015 requesting confirmation that capital gains derived by BBB from the sale of his shares of stock in JNE Philippines, Inc. ("JNE Philippines") to JNE Company Ltd., Inc. ("JNE") are exempt from capital gains 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") . DCATHS FACTS BBB is a resident of Korea based on a certification issued by the Incheon Metropolitan City of Korea. The name BBB is not a registered business name in the Philippines based on a certification issued by the Department of Trade of Industry. On the other hand, JNE Philippines is a domestic corporation engaged in subcontracting several processes for manufacturing flexible flat cable products including plating, cutting, assembly and outgoing inspection. Based on JNE Philippines ' 2014 General Information Sheet and Audited Financial Statements as of December 31, 2014, JNE Philippines is wholly-owned company of BBB, where he owns 5,621 of the 5,625 issued and subscribed common shares of JNE Philippines . Each share has a par value of P_____, and BBB 's shares represent 99% of the capital of JNE Philippines . However, as of that date, only 25% (P__________) of those shares are paid by BBB . BBB is also the President and one of the incorporators of JNE Philippines . On February 9, 2015, pursuant to a Deed of Assignment of Shares of Stock, BBB sold to JNE Company Ltd., Inc. ("JNE") all his shares in JNE Philippines for a consideration of P__________. Those shares constitute 1,406 paid and 4,215 unpaid shares of JNE Philippines . JNE is a foreign corporation organized and existing under the laws of Korea. As of December 31, 2014, the ratio of real property over the total assets of JNE Philippines is 80%, to wit: Total assets P____________ Real property Property and equipment (net of depreciation) to include leasehold improvements; machineries and equipment; waste water treatment; office equipment; and furniture and fixtures ____________ Rental deposit ____________ Prepaid rent ____________ Total ____________ Ratio of real property over total assets 80% Based on a sworn statement issued by JNE Philippines , 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. RULING Capital gains tax In reply, please be informed that under Section 25 (B) of the National Internal Revenue Code of 1997, as amended ("Tax Code") , capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation are subject to income tax under Section 24 (C) of the Tax Code, where such gains are subject to a tax rate of 5% to 10%, to wit: " SEC. 25. Tax on Nonresident Alien Individual. xxx xxx xxx (B) Nonresident Alien Individual Not Engaged in Trade or Business within the Philippines . There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24." " SEC. 24. Income Tax Rates. xxx xxx xxx (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange . The provisions of Section 39(B) notwithstanding, 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%" 1 However, under Se cti on 32 (B) (5) of the Tax Code, such gains are exempt to the extent required by any treaty obligation on the Philippines, to wit: AcSHCD " 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, paragraph 4, Article 13 (Capital Gains) of the Philippines-Korea tax treaty provides: "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 Article 13, capital gains from the alienation of shares of a domestic company may be taxed in the Philippines if the property of that company consists principally of immovable property situated in the Philippines. Under Section 2 (b) of Revenue Regulations No. 4-86 , 2 the term principally as used in the article on capital gains of tax treaties means that the ratio of the company's immovable property over its assets in terms of value is more than 50% , thus: " 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) Accordingly, since the ratio of JNE Philippines ' real property over its total assets is 80% , which is more than 50%, JNE Philippines ' assets consist principally of real property under Section 2 (b) of Revenue Regulations No. 4-86. This being so, pursuant to paragraph 4, Article 13 of the Philippines-Korea tax treaty, capital gains derived by BBB from the sale of all his shares in JNE Philippines to JNE are taxable in the Philippines in accordance with Section 24 (C) of the Tax Code as quoted above. Documentary stamp tax Finally, under Section 175 of the Tax Code, the sale by BBB of his shares in JNE Philippines is subject to documentary stamp tax equivalent to P0.75 on every P200.00, or fractional part thereof, of the par value of those shares, thus: " 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." 3 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. Republic Act No. 10963, otherwise known as the TRAIN (Tax Reform for Acceleration and Inclusion) Law , simplified and increased the tax rate on capital gains on disposition of shares to 15% to cover transactions beginning January 1, 2018 , to wit: " (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange . The provisions of Section 39(B) notwithstanding, a final tax at the rate of fifteen percent (15%) 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." (Underscoring supplied) 2. Determination of Whether the Assets of a Corporation Consist Principally of Real Property under the Philippine Tax Treaties . 3. The TRAIN Law also increased the tax rate on documentary stamp tax on transfer of shares of stock to P1.50 on each P200 , or fractional part thereof, of the par value of the share to cover transactions beginning January 1, 2018 , 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 One peso and fifty centavos (P1.50) 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 fifty percent (50%) of the documentary stamp tax paid upon the original issue of said stock." (Underscoring supplied)