ITAD Ruling No. 002-05

January 6, 2005 ITAD RULING NO. 002-05 Article 13, Philippines-Netherlands tax treaty Section 176, NIRC of 1997 BIR Ruling No. ITAD 201-02 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Emmanuel C. Alcantara Tax Services Gentlemen : This refers to your application for relief from double taxation dated December 21, 2004, on behalf of your client Panasonic Communications Imaging Corporation of the Philippines (PCIP),requesting for confirmation of your opinion that any gain from liquidating dividends to be derived by Panasonic Holdings ( Netherlands ) B. V. (PHN) from the surrender of its shares of stock in PCIP as a result of PCIP's dissolution is exempt from Philippine income tax, pursuant to Article 13 of the Philippines-Netherlands tax treaty. It is represented that PHN is a nonresident foreign corporation duly organized and existing under the laws of The Netherlands with principal office address at Strawinskylaan, 3105 7E ETAGE, 1077 ZX Amsterdam, The Netherlands; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated January 5, 2005; that PHN is fully owned by Matsushita Electric Industrial Co.,Ltd.,a corporation organized and existing under the laws of Japan; that PCIP is a corporation duly organized and existing under the laws of the Republic of the Philippines with principal office address at Lot C4-10 Carmelray Industrial Park II, Brgy. Punta, Calamba, Laguna; that PCIP is a wholly-owned subsidiary of PHN; that as part of a proposed reorganization, PCIP will sell its selected assets and liabilities to Panasonic Communications Corporation (PCP),a corporation also organized and existing under and by virtue of Philippine laws; that PCIP will then permanently cease business operations and will be subsequently dissolved; that upon dissolution, the remaining assets of PCIP will be declared as liquidating dividends in favor of PHN. In reply, please be informed that Article 13 of the Philippines-Netherlands tax treaty provides as follows, viz : "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 .(emphasis supplied) "5. The provisions of paragraph 4 shall not affect the right of each of the States to levy according to its domestic law a tax on gains from the alienation of any property derived by an individual who is a resident of the other State and has been a resident of the first-mentioned State at any time during the six years immediately preceding the alienation of the property." The ordinary connotation of liquidating dividend involves the distribution of assets by a corporation to its stockholder upon dissolution (Klein, Federal Income Taxation, 253-254 cited in the case of Wise & Co., Inc. et al. vs. Meer, et al., G.R. No. 48231, June 30, 1947).In the case of Wise & Co. v. Meer ,78 Phils. 655 (1947) the Supreme Court held that when a corporation is dissolved and in the process of complete liquidation and its shareholders surrendered their shares of stock to it and it paid sums of money to them in exchange, a transaction took place, which is no different in its essence from a sale of the same shares of stock to a third party who paid therefore. TcEDHa Accordingly, the conveyance of the remaining assets of PCIP in complete liquidation is considered a sale of shares of stock by PHN from which PHN may either realize a capital gain or loss resulting from the difference between the amount distributed and the cost or other basis of the shares of stock. Relative thereto, it is clear from the aforequoted provisions of the Philippines-Netherlands tax treaty that capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of Article 13 of the tax treaty shall be taxable only in the State where the alienator is a resident. Considering that the surrender of shares of stock to PCIP by PHN in exchange for the payment of liquidating dividends is deemed a sale of shares of stock and that such transaction is not among those mentioned in said paragraphs 1, 2 and 3 of Article 13 of the said tax treaty, the gains that may be derived by PHN, which is a resident of The Netherlands, from the surrender of its shares of stock in PCIP, a domestic corporation, 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. DA-ITAD 70-04 dated July 13, 2004) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. HAIaEc Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service