ITAD Ruling No. 034-02

March 27, 2002 ITAD RULING NO. 034-02 RP-Denmark-Article 13 BIR Ruling No. DA-ITAD-127-01 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Romeo H. Duran Tax Director Gentlemen : This refers to your application for relief from double taxation dated February 21, 2002, on behalf of your client, THE EAST ASIATIC COMPANY LTD. A/S (EACL A/S), requesting confirmation of your opinion that the assignment by EACL A/S of its shares in EAC Distributors, Inc. (EACDI), EAC Philippines, Inc. (EAC-Phils) and in FEZ-EAC Holdings, Inc. (FEZ-EAC) to Dumex Philippines, Inc. (DPI) is not subject to both income tax and capital gains tax pursuant to Article 13 of the RP-Denmark tax treaty. It is represented that EACL A/S is a non-resident foreign corporation duly organized and existing under the laws of Denmark; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated January 31, 2002; that the EACL A/S currently owns forty percent (40%) in equity of EACDI, ninety-two point six percent (92.6%) in equity of EAC-Phils and forty percent (40%) in equity of FEZ-EAC, which are all domestic corporations; that the audited financial statements of EACDI, EAC Phils. and FEZ-EAC for the years 1999 and 2000 disclose the following real property interest of the three (3) companies: Company Real Property Interest Ratio of Real Property (in PhP) Interest to Total Assets EACDI Nil 0.00% EAC Phils. Nil 0.00% FEZ-EAC Nil 0.00% that the EACL A/S will divest its entire equity in the three domestic corporations to DPI, another domestic corporation, for the following consideration: for the "B" shares of FEZ-EAC Holdings, Inc. P12,000,000.00 for the "B" shares of EACDI 20,000,000.00 for the "B" shares of EAC-Phils 2,833,600.00 for the "C" shares of EAC-Phils 50,436,000.00 Total P85,269,600.00 Book value per share as of the divested equities are as follows: for the "B" shares of FEZ-EAC Holdings, Inc. P24,296,266.08 for the "B" shares of EACDI 40,493,776.80 for the "B" shares of EAC-Phils 4,443,572.35 for the "C" shares of EAC-Phils 79,092,326.11 Acquisition cost of the shares are as follows: for the "B" shares of FEZ-EAC Holdings, Inc. P12,000,000.00 for the "B" shares of EACDI 20,000,000.00 for the "B" shares of EAC-Phils 2,833,600.00 for the "C" shares of EAC-Phils 50,436,000.00 In reply, please be informed that Article 13 of the RP-Denmark 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 and situated in the other Contracting State may be taxed in that other State. "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 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 with the whole enterprise) or of such fixed base, may be taxed in that other State. "3. Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships or aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. "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 an 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 that referred to in paragraphs 1, 2, 3 and 4 shall be taxable only in the Contracting State of which the alienator is a resident. "6. With respect to gains derived by the Danish, Norwegian and Swedish air transport consortium Scandinavian Airlines System (SAS), the provisions of paragraph 3 shall apply only to such proportion of the gains as corresponds to the participation held in that consortium by Det Danske Luftfartsselskab (DDL), the Danish partner of Scandinavian Airlines System (SAS). The gains which will be realized by EACL A/S from the intended sale of its shares of stock in EACDI, EAC-Phils and in FEZ-EAC to DPI shall be taxable in Denmark. However, under paragraph 4 of the aforequoted provision, the Philippines may tax the gains to be 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 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 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 1999 and 2000 Audited Financial Statements of EACDI, EAC-Phils and FEZ-EAC disclosed that their real property interest do not consist principally of real property interest located in the Philippines. Consequently, the gains, if any, shall be taxable only in Denmark since, pursuant to paragraph 5 of said Article, any capital gains which may be derived by EACL A/S from the alienation of any property, other than those mentioned in paragraphs 1, 2, 3, and 4 of Article 13 of the RP-Denmark tax treaty shall be taxable only in the Contracting State of which the alienator is a resident. Accordingly, your opinion that the intended sale by EACL A/S to DPI of its shares on EACDI, EAC-Phils and FEZ-EAC is not subject to capital gains tax is hereby confirmed. (BIR Ruling No. DA-ITAD 127-01 dated December 19, 2001) However, once the Share Purchase and Sale Agreement covering the intended sale of the subject shares of stock is executed by EACL A/S and DPI, said Agreement shall be subject to the documentary stamp tax imposed under Section 176 of the National Internal Revenue Code of 1997. This ruling shall be without force and effect unless and until an agreement or contract, which stipulations are found to be consistent with the representations made herein, is entered into by the parties involved. Thus, upon reaching a binding agreement or contract between and among the parties in this case, the instrument must be presented to the International Tax Affairs Division of this Bureau within 15 days from its due execution for verification whether the representations made herein upon which this ruling is based are consonant with the actual facts of the transaction. (BIR Ruling No. DA-ITAD-127-01 dated December 19, 2001). Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service