ITAD Ruling No. 068-02

April 24, 2002 ITAD RULING NO. 068-02 RP-France tax treaty, Article 13 BIR Ruling No. ITAD 201-00 Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Plaza 8741 Paseo de Roxas, Makati Attention: Priscilla B. Valer Jayson L. Fernandez Gentlemen : This refers to your application for relief from double taxation dated December 20, 2000, on behalf of SKW Nature Products Holding France SAS (SKW), requesting confirmation of your opinion that the sale by SKW of its shares of stock in Philippine Bio-Industries Inc. (Philbio) and SKW Biosystems Philippines, Inc. (SKW Phils) to SKW Nature Products Gmbh (SKW-Germany), is exempt from capital gains tax imposed under Section 28(b)(5)(C) of the NIRC of 1997 pursuant to Article 13 of the RP-France tax treaty. It is represented that SKW is a non-resident foreign corporation organized and existing under the laws of France with principal address at 4, Place des Ailes, 92100 Boulogne-Billancourt, France; that it is not registered either as a corporation or as partnership and has not been licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated February 16, 2001; that SKW owns Nine Hundred Thousand (900,000) shares of stock with a par value of One Hundred Pesos (P100) per share in Philbio and One Hundred Thirty One Thousand One Hundred Forty Five (131,145) shares of stock with a par value of One Hundred Pesos (P100) per share in SKW-Phils; that Philbio and SKW-Phils are corporations organized and existing under the laws of the Philippines; that SKW-Germany is a non-resident foreign corporation organized and existing under the laws of Germany with address at Dr.-Albert-Frank-Str. 32, 83308 Trostberg, Germany; that on July 13, 2000, SKW and SKW-Germany entered into two (2) Stock Purchase Agreements whereby SKW sold to SKW-Germany: (1) all its shares in Philbio at a purchase price equivalent to Two Million Eight Hundred Ninety Five Thousand Two Hundred Fifty Four US Dollars and Fifty Seven Cents (US$2,895,254.57) which is more or less equivalent to One Hundred Thirty Nine Philippine Pesos (Php139) per share; and (2) all its shares in SKW-Phils at a purchase price equivalent to Three Hundred Fifty Four Thousand Eight Hundred Seventy Seven US Dollars and Seventy Four Cents (US$354,877.74), which is more or less equivalent to One Hundred and Seventeen Philippine Pesos (Php117) per share. EaICAD It is further represented that Philbio entered into a lease contract dated April 14, 1994 with PBI Realty Corporation (a corporation organized and existing under the laws of the Philippines), whereby the latter leased a certain parcel of land to Philbio; that Philbio, pursuant to the lease contract, was given the right to make such constructions and improvements on the leased property as may be required by its business or the business of its subsidiaries and affiliates; and that Section 7 of the lease contracts provides: "7. Upon termination of this lease LESSEE shall have the right to remove all buildings and all of its machinery and equipment whether or not attached to buildings and all removable constructions, fixtures and improvements at its own discretion and for its own account. The LESSOR may request LESSEE not to remove the buildings. In such event, the LESSOR shall purchase the buildings at their fair market value. LESSEE may further allow LESSOR or any successor in the leased PROPERTY to purchase the buildings and such constructions and/or improvements that the LESSEE or its sublessee may construct on the PROPERTY pursuant to Articles 3 hereof at the fair market value of such buildings, constructions and/or improvements. Such fair market value shall, at the request of either party; be determined by an independent official appraiser appointed jointly by the parties. . . ." In this connection, it is your stand that for purposes of determining whether a Philippine corporation's entire assets consist principally of real property, the character of machinery placed by a lessee standing on the land of another, is not automatically real property but is determined by the intention of the parties. [citing the case of Davao Saw Mill Co. Inc. vs. Aproniano G. Castillo, et al. (No. 40411, August 7, 1935)] In reply, please be informed that Article 13 of the RP-France 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 or from the alienation of shares or comparable interest in a real property cooperative or in a company the assets of which consist principally of immovable property, may be taxed in the Contracting State in which such property is situated. "xxx xxx xxx "3. Gains from the alienation of any property other than those mentioned in paragraphs 1 and 2, shall be taxable only in the Contracting State of which the alienator is a resident. xxx xxx xxx" In the instant case, the gains which will be realized by SKW from the transfer of its shares of stock in Philbio and SKW-Phils to SKW-Germany shall be taxable only in France. However, under paragraph 1 of the aforequoted provision, 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) Paragraph 5 of Section 3 of the same Regulations provides, viz : "Section 3. Properties . The following are real property interest and/or real properties: "5. Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works; "Machinery mentioned above shall embrace machines, mechanical contrivances, instruments, appliances and apparatus attached to the real estate. It includes the physical facilities available for production, as well as the installations and appurtenant services facilities, together with all the other equipment designed for or essential to its manufacturing, industrial, or agricultural purposes." In the case of Davao Saw Mill Co. Inc. vs. Aproniano G. Castillo, et al, (supra) , the Supreme Court [citing the United States case of Valdez vs. Central Altagracia (225 US 58)] held that: ". . . Machinery which is movable in its nature only becomes immobilized when placed in a plant by the owner of the property or plant, but not so when placed by a tenant, a usufructuary, or any person having only a temporary right, unless such person acted as the agent of the owner." DTAIaH xxx xxx xxx "The distinction rests . . . upon the fact that one only having a temporary right to the possession or enjoyment of property is not presumed by the law to have applied movable property belonging to him so as to deprive him of it by causing it by an act of immobilization to become the property of another. It follows that abstractly speaking the machinery put by the Altagracia Company in the plant belonging to Sanchez did not lose its character of movable property and become immovable by destination. But if the concrete immobilization took place because of the express provisions of the lease under which the Altagracia held, since the lease in substance required the putting in of improved machinery, deprived the tenant of any right to charge against the lessor the cost of such machinery, and it was expressly stipulated that the machinery so put in should become part of the plant belonging to the owner without compensation to the lessee. Under such conditions the tenant in putting in the machinery was acting but as the agent of the owner in compliance with the obligations resting upon him, and the immobilization of the machinery which resulted arose in legal effect from the act of the owner in giving by contract a permanent destination to the machinery." In view of the foregoing pronouncement, the machinery of Philbio located on the property leased from PBI Realty Corporation may not be treated as real property not only because it is so placed by a mere lessee (i.e., Philbio) but also because the latter did not act as an agent of the lessor (i.e. PBI Realty Corporation), as it is stipulated in the said lease contract that all improvements (including machineries and equipment) on the leased premises, upon its termination, shall be removed, except as may be otherwise requested by the lessor, in which case, the fair market value therefor shall be paid. Such being the case, machinery placed by the lessee shall be considered as personal property for purposes of determining whether a Philippine Corporation's entire assets consist principally of immovable property. Upon verification of the December 31, 1999 Audited Financial Statements of Philbio and SKW-Phils, it is disclosed that real property interest and/or real properties located in the Philippines of Philbio and SKW-Phils do not consists principally of real property interest and/or real properties located in the Philippines. Hence, the gains from the sale of 900,00 shares of stock in Philbio and the 131,145 shares of stock in SKW-Phils to SKW-Germany shall not be taxable in the Philippines. ( BIR Ruling No. ITAD 201-00 ) Accordingly, the sale by SKW of its shares of stock in SKW-Phils and in Philbio to SKW-Germany shall be exempt from capital gains tax under Section 28(b)(5)(C) of the Tax Code of 1997, pursuant to Article 13 of the RP-France tax treaty. Furthermore, a certificate of authority to register the said transaction in the books of SKW-Phils and Philbio must be secured. Thus, SKW is required to file a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Deed of Assignment and this ruling with Revenue District Office No. 39 South, Quezon City (RDO 39), for the issuance of a Certificate Authorizing Registration (CAR) of the subject shares of stock of SKW-Phils and Philbio in favor of SKW-Germany. However, SKW is not required to pay the capital gains tax on its sale of the said shares. In addition, Section 176 of the National Internal Revenue Code (Tax Code) of 1997 provides, viz : "Sec. 176. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Due-bills, Certificates of Obligation, or Shares or Certificates of Stack . On all sales or agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or certificates of stock in any association, company; or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such due-bills, certificates of obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill, certificate of obligation or stock, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such due-bill, certificate of obligation or stock: Provided , That only one tax shall be collected on each sale or transfer of stock or securities from one person to another, regardless of whether or not a certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer: . . ." The same Tax Code provides that the corresponding documentary stamp taxes shall be levied, collected and paid, for and in respect of the transactions so had or accomplished, by the person making, signing, issuing, accepting, or transferring the document, instrument or paper wherever the same is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines. Thus, the burden of paying the documentary stamp tax is placed upon the parties to the contract and leaves the tax to be paid indifferently by either party, and accordingly, the party assuming payment of said tax under the contract becomes directly liable therefor. But if for one reason or another, the said tax is not paid, either party to the contract may be made liable to the tax. In fine, upon presentment of the Capital Gains Tax Return filed with the BIR, as above stated, the CAR, and the proof of payment of documentary stamp thereon, the corporate secretary of SKW-Phils and Philbio shall be authorized to register the transfer of the shares from SKW to SKW-Germany in the Stock and Transfer Book of the Corporation concerned and to cancel and issue new certificates in the name of SKW-Germany. This ruling is issued on the basis of the foregoing representations. However, if upon investigation it shall be disclosed or 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