Buan & Temprosa Law Offices

October 23, 2018 ITAD BIR RULING NO. 108-18 Article 13 (Gains from the Alienation of Property) Philippines- Netherlands tax treaty Buan & Temprosa Law Offices Unit 1005 and 1006, Cityland Condominium 10, Tower 1 156 H.V. dela Costa Street 1226 Makati City Attention: AAA BBB Gentlemen : This refers to your tax treaty relief application filed on April 4, 2017 requesting confirmation that capital gains derived by Universal Music International Holding B.V. ("UMIH") (formerly, Universal International Holding B.V.) from the transfer of its shares of stock in MCA Music, Inc. ("MCA") to Universal International Music B.V. ("UIM") are exempt from capital gains tax pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . HTcADC It is represented that UMIH and UIM are corporations organized and existing under the laws of the Netherlands and residents thereof based on their amended Articles of Association and Certificates of Residence issued by the Arnhem Tax Office in the Netherlands; that UMIH and UIM are engaged in the manufacture of audio and visual recordings; that both are not registered as corporations or partnerships in the Philippines based on the Certifications of Non-Registration of Company issued by the Securities and Exchange Commission; that on the other hand, MCA is a domestic corporation engaged in the business of development, production, licensing, importation, distribution and sale, on a wholesale basis, of records, compact discs, other recording accessories, computer software and other audio-visual carriers of musical copyright, artists and talents; that based on its Audited Financial Statements as of December 31, 2015, General Information Sheet as of September 9, 2016, and Corporate Secretary's Certificate issued by MCA on April 3, 2017, MCA is a wholly owned subsidiary of UMIH ,where it holds 59,995 common shares of MCA ,each share with a par value of Php__________, or a total value of Php_______________; and that those shares account for 99.99% ownership in MCA . It is further represented that on December 29, 2015, UMIH and UIM entered into a Deed of Merger where UMIH was designated as the company ceasing to exist and UIM as the acquiring company; that UIM will acquire the assets and liabilities of UMIH under a universal title of succession; that the merger will take effect on December 30, 2015; that based on the Merger Proposal of the Management Boards of UMIH and UIM ,because there are no persons who, in any other capacity than as shareholder, have special rights against UMIH ,no special rights and no compensations will be granted to anyone at the expense of UIM ;that the merger is necessary in order to simplify the corporate structure of the group and to save costs by way of integrating the activities of the merging companies; and that after the merger, UIM will acquire 99.99% ownership in MCA thereby transferring UMIH 's shares in MCA to UIM . It is finally represented based on a certification issued by MCA 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 proceeding, or judicial appeal. In reply, please be informed that under Section 28 (B) (5) (c) of the National Internal Revenue Code of 1997, as amended ("Tax Code") ,net capital gains derived by a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 5% or 10%,thus: " 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 or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: " 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-Netherlands tax treaty provides as follows: "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 of Article 13, gains from the alienation of property arising in the Philippines, other than that referred to in paragraph 1 (immovable property) ,2 (movable property of a permanent establishment or a fixed base) or 3 (ships and aircraft operated in international traffic) ,and derived by a resident of the Netherlands shall be taxable only in the Netherlands. aScITE Accordingly, since shares of stock are not among the kinds of property referred to in paragraphs 1, 2 and 3, Article 13 of the Philippines-Netherlands tax treaty, capital gains derived by UMIH from the transfer of its shares in MCA to UIM are exempt from capital gains tax in the Philippines pursuant to paragraph 4, Article 13 of the treaty. However, since the transfer of shares in MCA does not involve the payment of compensation by UIM to UMIH ,there is no resulting net capital gains in the transaction for the purpose of applying the capital gains tax. This being so, instead of capital gains tax, such transfer without compensation constitutes a donation under Sections 98 and 99 of the Tax Code and subject to donor's tax at the rate of 30%, thus: " 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. 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, 1 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, the 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. HEITAD Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. 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 .