ITAD Ruling No. 001-01

January 17, 2001 ITAD RULING NO. 001-01 RP-Netherlands, Art. 13 NIRC Sec. 28 (B) (5) (C) ITAD 145-00 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: M . F . A . BALILI Tax Division Gentlemen : This refers to your letter dated April 28, 2000 requesting on behalf of your client, Pacific Bakun Energy B.V. (PacBV), for confirmation of your opinion that the gain from sale by PacBV of its shares in Luzon Hydro Corporation (LHC) to Pacific Hydro Broker, Inc. (PHBI) and Benguet Hydro Power Corporation (BHC) is exempt from capital gains tax pursuant to the RP-Netherlands Tax Treaty. ICESTA It is represented that PacBV (formerly Dorecon International B.V.) is a non resident foreign corporation duly organized and existing under the laws of the Netherlands; that on January 1997, PacBV under the name of Dorecon International B.V. purchased the shares held by Ever Electrical (Ever), a Philippine company, in LHC, a corporation organized and existing under and by virtue of the laws of the Philippines with principal office at Cebu City; that PacBV joined PHBI, a corporation duly organized and existing under the laws of the Philippines with office address c/o Quisumbing Torres, 11th Floor Pacific Star Building, Makati Avenue corner Sen. Gil J. Puyat Avenue, Makati City, and BHC, a corporation organized and existing under the laws of the Republic of the Philippines with office address at the Aboitiz Corporate Center, Archbishop Reyes Avenue, Banilad Cebu City, as stockholders of LHC with each of them owning one third (1/3) interest in LHC; that in May 1997, PacBV established a Philippine branch (PacBV-Branch) for purpose among others of investing in a Philippine limited partnership called Luzon Hydro Corporation Ltd. (the partnership) and of holding shares in LHC; that PacBV-Branch, PHBI and BHC were likewise equal partners in the Partnership; that PacBV-Branch, BHC and PHBI collectively have a 99% limited partnership interest in the Partnership while LHC has the remaining 1% general partnership interest; that as alleged in the Sworn Statement executed by the Corporate Secretary of LHC, its Stock and Transfer Book reflects that on May 5, 1997, the 416,665 LHC shares were transferred from Ever to PacBV notwithstanding the fact that PacBV-Branch was already existing at that time; that on October 5, 2000, PacBV transferred said LHC shares in favor of its two partners, PHBI and BHC independent of its branch per Deed of Assignment dated October 5, 2000. In reply, pleased be informed that Article 13 of the RP-Netherlands Tax Treaty provides as follows: "Article 13 "Gains from the Alienation of Property "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 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 or 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 paragraph 1, 2 and 3 shall be taxable only in the State of which the alienator is a resident. " TSacID The situation of a parent company entering into a business transaction without the participation of its branch is separate and distinct from the activities of the parent company for tax purposes is recognized by the Supreme Court in the case of Marubeni vs. CIR, (G.R. No. 76573 dated September 14, 1989) wherein it was enunciated as follows: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside . The transaction becomes one of the foreign corporation, not of the branch . Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation . Corollary, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation ." (emphasis ours) As represented, the LHC shares were purchased by PacBV prior to the establishment of the PacBV-Branch, hence, the latter has no participation thereto. Accordingly, when PacBV sells its LHC shares independently of its Philippine branch, PacBV-Branch, such transaction is that of PacBV alone and should not be attributed to its branch. It is clear from the aforequoted provisions of the RP-Netherlands Tax Treaty that capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 shall be taxable only in the State where the alienator is a resident. Considering that the sale of shares of stock is not among those mentioned in paragraphs 1, 2 and 3, the gains that may be derived by PacBV from the sale of its shares of stock in LHC in favor of its two partners, PHC and BHC, shall not be subject to Philippine income tax under Section 28(B)(5)(c) of the Tax Code of 1997, but are subject to tax only in the Netherlands. (BIR Ruling No. ITAD-145-00 dated October 17, 2000) However, the said sale by PacBV to PHC and BHC is subject to documentary stamp tax in accordance with Section 176 of the Tax Code, as amended. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group