ITAD Ruling No. 093-00

August 1, 2000 ITAD RULING NO. 093-00 RP-Singapore Article 13 NIRC-Sec. 176 52-99 Quisumbing Torres 11th Floor, Pacific Star Building Makati Ave., corner Sen. Gil. J. Puyat Ave. Makati City 1200 Attention: Atty . Jose R . Sandejas Atty . Jose Jaime V . Cruz Gentlemen : This refers to your letter dated March 09, 2000 applying, on behalf of your client CDL Entertainment & Leisure Pte. Ltd. ("CDLE&L"), for tax exemption on any gain that it may derive from the sale of its shareholdings to CDL Hotels (Phils.) Corporation ("CDLHP"), pursuant to the provision of Article 13 of the RP-Singapore Tax Treaty. It is represented that CDLE&L is a corporation organized and existing under the laws of Singapore and is not licensed to do business in the Philippines as evidenced by the Certificate of Non-Registration issued by the Securities and Exchange Commission dated February 17, 2000; that CDLHP is a corporation organized and existing under Philippine laws; that CDLE&L owns 52,695 of CDLHP's 60,000 authorized capital stocks represented by Stock Certificate No. 006 with a par value of P100.00 per share; that based on CDLHP's audited financial statements, it does not own any immovable property; that on January 20, 2000, the Board of Directors of CDLHP approved a share buyback exercise involving its stockholders; and that under the share buyback exercise, CDLHP will purchase 1 share out of every 5 shares of capital stocks at P1,250.00 per share which made CDLE&L interested to sell 10,539 shares out of its 52,695 shares. In reply, please be informed that Article 13 of the RP-Singapore Tax Treaty, provides: "Article 13 Gains from the Alienation of Property (1) Gains from the alienation of immovable property, 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 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 or 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. (4) Gains from the alienation of any property, other than those mentioned in paragraph 1, 2 and 3 shall be taxable only in the Contracting State of which the alienator is a resident." Paragraph 3 of the aforequoted Article grants the Philippines the right to tax gains derived from the disposition of interest in a corporation if its assets consist principally of real property interests located in the Philippines. Section 3 of Revenue Regulations No. 4-86 provides guidance on the meaning of "consisting principally of real property interest": "SEC. 2. Definitions . For purposes of these Regulations, the following terms and phrases shall be understood to mean a) 'Real Property Interest' interest on properties enumerated in Section 3 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; b) 'Principally', 'wholly or principally', directly principally' or 'attributable' more than 50% of the entire assets in terms of value; xxx xxx xxx" Based on the CDLHP's audited financial statements dated December 31, 1999, CDLHP does not own any immovable property instead, its assets consist entirely of current assets. In view thereof, this Office confirms that the sale made by CDLE&L of its shares of stocks to CDLHP is not subject to capital gains tax. Notwithstanding this exemption, the sale of shares of stocks is subject to the documentary stamp tax under Section 176 of the Tax Code. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be disclosed that the facts are different, then this ruling, shall be considered null and void. prcd Please be guided accordingly. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group