ITAD Ruling No. 082-01

September 27, 2001 ITAD RULING NO. 082-01 RP-Spain Article 13 NIRC Sec. 176 BIR Ruling No. ITAD-153-00 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr. Jose A. Osana Tax Division Gentlemen : This refers to your letter dated August 28, 2001 on behalf of your clients, San Miguel Corporation ("SMC") and Campofrio Alimentacion, S.A. ("Campofrio"), requesting confirmation that the sale by Campofrio to SMC of its 50% equity in San Miguel Campo Carne Corporation ("SMCC") is not subject to capital gains tax pursuant to Article 13 of the RP-Spain Tax Treaty. Documents submitted show that Campofrio is a non-resident foreign corporation duly organized and existing under the laws of Spain with principal office address at Avenida de Europa, 24 Parque Empresarial La Moraleja, 28108 Alcobendras, Madrid, Spain; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines as per Certificate of Non-registration issued by the Securities and Exchange Commission (SEC) dated July 06, 2001; that SMC is a corporation duly organized and existing under the laws of the Philippines; that in 1991, Campofrio entered into a Joint Venture Agreement ("JVA") with SMC; that pursuant to the JVA, SMCC, the joint venture company, was organized and established under the laws of the Philippines with Campofrio and SMC each owning fifty percent (50%) of the total outstanding capital stock; that on March 21, 2001, SMC filed a complaint against Campofrio to compel the latter to consummate an agreement to purchase all of SMC's shares of stock in SMCC; that on April 06, 2001, in order to settle all their claims against each other in respect of the aforementioned civil case, and any other case that may have been filed by either of them against each other in connection with or arising from the JVA, SMC and Campofrio entered into a Compromise Agreement whereby Campofrio shall sell all of its shares of stock in SMCC to SMC; and that since SMCC's real property interest as per its audited financial statements as of December 31, 2000, is not more than 50% of its entire assets in terms of value, it is your opinion that the sale by Campofrio of its SMCC shares to SMC shall not be subject to capital gains tax. In reply, please be informed that Article 13 of the RP-Spain Tax Treaty provides, viz : "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. "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 a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. (Emphasis 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." Based on the aforequoted provisions of the RP-Spain tax treaty, the gains which will be realized by Campofrio from the sale of its shares of stock in SMCC to SMC is taxable in Spain. However, under paragraph 3 of the said provisions, 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 December 2000 and 1999 Audited Financial Statements of SMCC disclosed that its real property interest located in the Philippines is only 45% of its total assets, thereby making the assets of SMCC not principally consisted of real property interest located in the Philippines. Accordingly, your opinion that the sale by Campofrio Alimentacion, S.A. to San Miguel Corporation of its shares in San Miguel Campo Carne Corporation is not subject to capital gains tax is hereby confirmed. (BIR Ruling No. ITAD-153-00 dated October 23, 2000) However, the aforementioned Deed of Assignment of shares of stocks shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service