ITAD Ruling No. 007-02

January 23, 2002 ITAD RULING NO. 007-02 Article 13, RP-Japan BIR Ruling No. ITAD-40-00 Joaquin Cunanan & Co . 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: George J . Lavadia Principal Tax Services Department Gentlemen : This refers to your application for tax treaty relief dated March 6, 2001 requesting confirmation of your opinion that the sale by Kasei Industry Co. Ltd. (Kasei) to Oxon Co. Ltd (Oxon) of its shares in K & K Molding, Inc. (K & K) is not subject to capital gains tax pursuant to the RP-Japan tax treaty. It is represented that Kasei and Oxon are both foreign corporations duly organized and existing in accordance with the laws of Japan; that Kasei is not registered either as a corporation or as a partnership in the Philippines as per certification dated March 8, 2001 issued by the Securities and Exchange Commission; that K & K is a domestic corporation duly organized and existing under the laws of the Philippines with office address at Lima Technology Center, Special Economic Zone, Lipa City, Batangas; that as of February 13, 1999, Kasei is the owner on record of` Seven Hundred Thirteen Thousand Nine Hundred Ninety-Seven (713,997) shares in the capital stock of K & K with a total par value of One Hundred Pesos (Php100.00) representing 51% of K & K's capital stock; that on February 13, 2001, by virtue of the Deed of Assignment by and between Kasei and Oxon, Kasei sold its Three Hundred Fifty Thousand (350,000) shares of stocks to Oxon for JY284 per share; and that in consideration of the said transfer, Oxon paid a total of Ninety Nine Million Four Hundred Thousand Japanese Yen (JY99,400,000). In reply, please be informed that article 13 of the RP-Japan tax treaty provides as follows: "Article 13 "(1) Gains derived by a resident: of a Contracting State from the alienation of immovable property as defined in paragraph 2 of Article 6 and situated in the other Contracting State may be taxed in that other Contracting State. "(2) Gains from the alienation of any property, other than immovable property, forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of any property, other than immovable property, pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal 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 that other Contracting State. "(3) Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic and any property, other than immovable property, pertaining to the operation of such ships or aircraft shall be taxable only in that Contracting State. "(4) Gains from the alienation of shares of a company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State. ATICcS "(5) Gains from the alienation of any property other than those referred to in paragraphs (1), (2), (3) and (4) shall be taxable only in the Contracting State of which the alienator is a resident." Based on the foregoing Article, the gains realized by Kasei from the transfer of its shares of stock in K & K to Oxon are taxable in Japan. However, under paragraph 4 thereof, the Philippines may tax the gains derived from the disposition of interest in a corporation if its entire assets consist principally of real property interest located in the Philippines. "Real Property Interest" means interest in properties enumerated in Section 3 of the Revenue Regulations No. 4-86 which are not, however, exclusive of others that are similarly situated. As used in the treaties and in the Regulations, it shall be understood to include real properties as understood under Philippine Laws. Moreover, "Principally" means more than 50% of the entire assets in terms of value. [Sec. 2(a) and (b), Revenue Regulations No. 4-86]. Verification of the Audited Financial Statement for December 31, 2000 of K & K disclosed that its real property interest is valued at P333,323,709 or 43.16% of its total assets. This includes net property & equipment located in the Philippines valued at P299,709,799 and prepaid rental of P33,613,910. Under Section 3 of Revenue Regulations No. 4-86, Real Property Interest includes "contracts for public works and servitudes and other real rights over immovable property including real estate mortgages, possessory retentions, antichresis, usufructs and lease of property " (emphasis supplied). Clearly, the contract entered into by K & K for the lease of land for its plant and office premises for a period of 50 years, renewable for another 25 years, is embraced within the term "Real Property Interest". Accordingly, this Office is of the opinion and so holds that the transfer by Kasei Industry Co. Ltd. of its shares in K & K. Molding, Inc. to Oxon Co. Ltd is not subject to capital gains tax. However, the Deed of Assignment of Shares of Stock is subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997 (BIR Ruling No. ITAD-40-00 dated February 10, 2000) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service