ITAD Ruling No. 027-99

October 7, 1999 ITAD RULING NO. 027-99 RP-Korea-Art. 13 NIRC-SEC. 176 007-96 Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower, Citibank Plaza, 8741 Paseo de Roxas Makati City Attention: Atty . Perry L . Pe and Atty . Jayson L . Fernandez Gentlemen : This refers to your letter dated July 08, 1999, requesting confirmation of your opinion that the sale of your client, KOREA MERCHANT BANKING CORPORATION (KMBC) of its shares of stock in ALL ASIA CAPITAL AND TRUST CORPORATION (ALL ASIA) to LOMBARD ASIAN PRIVATE INVESTMENT COMPANY LDC (LOMBARD), is exempt from capital gains tax, pursuant to Article 13 of the RP-Korea Tax Treaty. It is represented that KMBC is a non-resident foreign corporation duly organized and existing under the laws of Korea; that it is not registered either as a corporation/partnership in the Philippines as per certification dated July 09, 1999 issued by the Securities and Exchange Commission (SEC); that it owns Six Million Nine Hundred Ninety Four Thousand Two Hundred Ninety Six (6,994,296) shares of stock with a par value of P10.00 per share or a total par value of Sixty Nine Million Nine Hundred Forty Two Thousand Nine Hundred Sixty Pesos (P69,942,960.00) in ALL ASIA, a corporation duly organized and existing under the laws of the Philippines; that on July 01,1999, a Share Purchase Agreement was entered into by and between KMBC and LOMBARD, a non-resident foreign corporation duly organized and existing under the laws of the Cayman Islands, whereby KMBC sold its 6,994,296 common shares in ALL ASIA to LOMBARD; that the assets of ALL ASIA do not consist principally of real property interest located in the Philippines, as shown in its latest Audited Financial Statements (as of and for the years ended December 31, 1998 and 1997). In reply, please be informed that Article 13 of the RP-Korea Tax Treaty provides as follows: "Article 13 CAPITAL GAINS 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 (Income from Immovable Property), and situated in the other Contracting State may be taxed in that other State. cdll 2. Gains from the alienation of movable 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 movable property pertaining to a fixed base available to a resident of Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such permanent establishment (alone or with the whole enterprise) or of such fixed base may be taxed in that other State. 3. Gains from alienation of ships or aircraft operated in international traffic by enterprises of a Contracting State or gains from alienation of movable property pertaining to the operation of such ships or aircraft, shall be taxable only in that State of which the enterprise is a resident. 4. Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Gains from the alienation of interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. 5. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2, 3, and 4 shall be taxable only in the Contracting State of which the alienator is a resident." the gains which will be realized by KMBC from the sale of stock in ALL ASIA to LOMBARD shall be taxable only in Korea. However, under the aforequoted provision of paragraph 4 supra, the Philippines may tax the gains derived from the disposition of interest in a corporation if its interest in a corporation consist principally of real property interest located in the Philippines. Real Property Interest means interest on properties enumerated in Section 3 of 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 1997 and 1998 Audited Financial Statements of ALL ASIA disclosed that its real property interest is less than 50% of its entire assets. Accordingly, your opinion that the sale of KOREA MERCHANT BANKING CORPORATION of its share of stock in ALL ASIA CAPITAL & TRUST CORPORATION to LOMBARD ASIAN PRIVATE INVESTMENT COMPANY LDC is not subject to Philippine income tax is hereby confirmed. However, the Share Purchase Agreement shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. (BIR Ruling No. 007-96 dated January 18, 1996) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the actual facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group