ITAD Ruling No. 038-00

February 4, 2000 ITAD RULING NO. 038-00 RP-Spain Article 13 007-96 Abello Concepcion Regala & Cruz ACCRA Building, 122 Gamboa Street Legaspi Village, Makati City Attention: Atty . Aleli Angela G . Quirino and Atty . Ruby Rose J . Yusi Gentlemen : This refers to your letter dated November 29,1999 requesting confirmation of your opinion to the effect that the assignment and transfer by Union Fenosa Inversiones S.A. (UFINSA) to Union Fenosa Desarrollo y Accion Exterior, S.A. (UFACEX) of its shares in First Philippine Union Fenosa, Inc. (FPUF) is not subject to capital gains tax pursuant to the RP-Spain Tax Treaty. LexLib It is represented that UFINSA is a non-resident foreign corporation duly organized and existing under the laws of Spain; that it is not registered either as a corporation/partnership in the Philippines as per certification dated December 13, 1999 issued by the Securities and Exchange Commission; that FPUF is a corporation duly organized and existing under the laws of the Philippines; that UFACEX, a subsidiary of UFINSA, is a non-resident foreign corporation organized and existing under the laws of Spain; that UFINSA is the stockholder of record of forty percent (40%) of the outstanding capital stock of FPUF equivalent to One Thousand Six Hundred Ninety Eight (1,598) Class "A" Common shares of stock and Seven Million Nine Hundred Ninety Three Thousand Six Hundred (7,993,600) Class "B" Preferred Redeemable shares of stock, with a par value of One Hundred Pesos (P100.00) per share; that on November 29, 1999, by virtue of the Deed of Assignment of Shares executed by UFINSA and UFACEX, UFINSA transferred and assigned to UFACEX all its shares in FPUF pursuant to a reorganization plan. In reply, please be informed that Article 13 of the RP-Spain Tax Treaty, provides as follows: "Article 13 Capital Gains "(1) Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6 may be taxed in the Contracting 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 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 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. However, gains derived by an enterprise of a Contracting State 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. LibLex "(3) 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 trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. (Italics supplied) "(4) Gains from the alienation of any property other than those mentioned in paragraphs 1,2 and 3 shall be taxable only in the Contracting State of which the alienator is a resident." (Emphasis supplied) the gains which will be realized by UFINSA from the transfer of its shares of stock in FPUF to UFACEX shall be taxable only in Spain. However, under the aforequoted provision of paragraph 3 supra, 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 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 Audited Financial Statement of FPUF as of June 30, 1999 disclosed that it does not own real properties. Accordingly, your opinion that the assignment and transfer by Union Fenosa Inversiones S.A. (UFINSA) of its shares in First Philippine Union Fenosa, Inc. (FPUF) to Union Fenosa Desarrollo y Accion Exterior, S.A. (UFACEX) is not subject to Philippine income tax is hereby confirmed. However, the Deed of Assignment of Shares 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) prcd This ruling is being issued on the basis of the facts as represented. However, if upon investigation, it will be disclosed that the 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