ITAD Ruling No. 001-02

January 2, 2002 ITAD RULING NO. 001-02 RP-Netherlands, Article 13 BIR Ruling No. ITAD 036-01; 011-01; 008-01; 44-00 Laya Mananghaya & Company Certified Public Accountants and Management Consultants 22/F Philamlife Tower 8767 Paseo de Roxas Makati City 1226 Attention: Remegio A . Noel Partner, Tax & Corporate Services Gentlemen : This refers to your application for relief from double taxation dated August 21, 2001 on behalf of your client, Organon (Philippines) Inc. (Organon Philippines), requesting confirmation of your opinion that the gain to be realized from the transfer by Akzo Nobel Holding Duistland BV (Akzo Nobel) of its shares of stocks in Organon Philippines to Organon Holding BV (Organon Holding) shall not be subject to Philippine income tax under Section 27(D)(2) of the Tax Code of 1997 pursuant to the RP-Netherlands tax treaty. It is represented that Akzo Nobel, formerly Organon Holding, is a corporation duly organized and existing under the laws of The Netherlands, with principal office located at Velperweg 76, 6824 BM Annheim, The Netherlands; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated August 14, 2001; that it is the owner of 179,975 shares of Organon Philippines as evidenced by its Stock Certificate No. 48 issued on August 11, 1997; that pursuant to a worldwide reorganization of Dutch Pharma Holding companies on December 15, 2000, Akzo Nobel incorporated a new Organon Holding and contributed all its direct shareholdings in Organon companies, which includes Organon Philippines, into the new Organon Holding; that a Deed of Assignment dated May 7, 2001 was executed whereby Akzo Nobel, "the assignor", transferred its 179,975 shares of stock in Organon Philippines in favor of the Organon Holding, "the assignee", for and in consideration of Php17,997,500.00; that Organon Holding is a corporation organized and existing under the laws of The Netherlands with address at Wethouder van Eschstraat 1, 5432 AV Oss, The Netherlands; that Organon Philippines is a corporation organized and existing under Philippine laws with principal office address at Unit 18-1, 18th floor, Citibank Center, 8741 Paseo de Roxas, Makati City; that its current capital structure, as certified by its Corporate Secretary dated July 3, 2001 and November 6, 2001, is as follows: Name Nationality No. of Shares Subscribed Organon Holding Dutch 179,975 Henrikus Marie Joseph Dutch Radder 5 Tjeerd Kalff Dutch 5 Rene Y. Soriano Filipino 5 Leslie C. Dy Filipino 5 Marjanna Prins Dutch 5 TOTAL 180,000 ====== that the above structure was made pursuant to the aforementioned deed of assignment executed by the parties whereby the corporation divested the ownership of 179,975 shares of stock in the name of Organon Holding. In reply, please be informed that Article 13 of the RP-Netherlands tax treaty provides as follows: EIcTAD "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 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. xxx xxx xxx." It is clear from the aforequoted Article 13 of the RP-Netherland tax treaty that capital gains derived from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 thereof shall be taxable only in the State where the alienator is a resident. Inasmuch as the assignment or transfer of shares of stock is not among those mentioned in said paragraphs 1, 2 and 3, the gains derived by Akzo Nobel, a resident of The Netherlands, from the sale/transfer of its shares of stock. in Organon Philippines are not subject to the capital gains tax imposed under Section 27(D)(2) of the NIRC (Tax Code) of 1997, but are subject to tax only in The Netherlands. (BIR Ruling Nos. ITAD 036-01, 011-01 and 008-01) However, a certificate of authority to register the said transaction in the books of Organon Philippines must be secured. Thus, Akzo Nobel, while not required to pay capital gains tax, is required to file a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Deed of Assignment and this ruling, with Revenue District Office No. 39 South Quezon City (RDO 39), for the issuance of a Certificate Authorizing Registration (CAR) of the said shares of stock in favor of Organon Holding. (BIR Ruling No. ITAD 44-00) Finally, notwithstanding the exemption from capital gains tax, the documentary stamp tax on the said transaction must be paid and the corresponding return thereon be filed by Akzo Nobel in accordance with Section 176 of the Tax Code of 1997. This ruling is issued on the basis of the foregoing facts as represented. If upon investigation it shall be disclosed that the facts are different, then this ruling shall be rendered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service