ITAD Ruling No. 096-01

October 19, 2001 ITAD RULING NO. 096-01 RP-France, Art. 13 BIR Ruling Nos. UN-296-8-11-95 and DA-03902-5-98 The Law Firm of Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue corner Poveda Street Ortigas Center, 1605 Pasig City Attention: Orencio F . Ibarra, Jr. Benedict R. Tugonon Gentlemen : This refers to your letter dated July 26, 2001, requesting for a ruling exempting your client, Geodis [previously named Compagnie General Calberson] (Geodis) from the payment of capital gains tax on the sale of its 149,926 shares in Royal Cargo Corporation (Royal Cargo) in favor of Geodis Asie (Geodis Asie) pursuant to Article 13 of the RP-France tax treaty. It is represented that Geodis is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of France with office address at 183 Avenue de Clichy 75017 Paris, France; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per Securities and Exchange Commission (SEC) certification dated June 7, 2001; that Geodis owns 149,926 shares in Royal Cargo; that Geodis Asie is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of France with office address at 183 Avenue de Clichy 75017 Paris, France; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per SEC certification dated June 28, 2001; that Royal Cargo is a domestic corporation organized and existing under the laws of the Philippines with principal place of business at the RCC Bldg., Sta. Agueda cor. Pascor Drive, Paraaque, Metro Manila and engaged in the business of freight-forwarding; that on June 6, 2001, Geodis sold its 149,926 shares in Royal Cargo to Geodis Asie. 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 . (Emphasis supplied) "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 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. (Emphasis Supplied) xxx xxx xxx" Based on the foregoing, the gains which will be realized by Geodis from the transfer of its shares of stock to Geodis Asie are taxable 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 read 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 Statements of Royal Cargo disclosed that its net property and equipment located in the Philippines are valued at P74,260,466 net of depreciation as of December 31, 2000 representing only 32.36% or less than fifty percent (50%) of its total assets of P229,478,152 thereby making the assets of Royal Cargo not consisted principally of real property interest located in the Philippines up to the date of subject sale. Accordingly, this Office confirms your opinion and so holds that the gains from the sale by Geodis of its shares of stock in Royal Cargo to Geodis Asie are not subject to Philippine income tax. (BIR Ruling UN-296-8-11-95 dated June 22, 1995 and DA-039-2-5-98) However, the transfer of the shares of stock shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. Upon presentment of proof of payment of the documentary stamp tax, the Corporate Secretary of Royal Cargo can register the transfer of the shares from Geodis to Geodis Asie in their respective Stock and Transfer Books and cancel and issue new stock certificates in the name of Geodis Asie. 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 T. REGALADO Assistant Commissioner Legal Service