ITAD Ruling No. 102-01

October 26, 2001 ITAD RULING NO. 102-01 Art. 12, RP-UK Tax Treaty Sec. 176, NIRC BIR Ruling No. ITAD-43-01 Sycip Salazar Hernandez & Gatmaitan SycipLaw-All Asia Capital Center 105 Paseo de Roxas 1226 Makati City Attention: Atty. Carina C. Laforteza Atty. Roel A. Refran Atty. Rena M. Rico Gentlemen : This refers to your letter dated July 26, 2001 requesting confirmation of your opinion to the effect that the sale and transfer by your client, Courtaulds Textiles Investments Ltd. (CTIL) of its shares of stock in Laguna Realty Corporation (LRC) and Penn Philippines, Inc. (PPI) to Dogi, S.A. (Dogi) is not subject to capital gains tax pursuant to the RP-UK tax treaty. ScaHDT It is represented that CTIL is a non-resident foreign corporation duly organized and existing under the laws of the United Kingdom with principal office address at 225 Bath Road, Slough, Berkshire SL1 4AU, England; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated July 9, 2001 issued by the Securities and Exchange Commission; that LRC and PPI are corporations duly organized and existing under the laws of the Philippines, both with principal office address at FTI Electronics Avenue, FTI Complex, Taguig, Metro Manila; that as of May 25, 2001, CTIL is the stockholder of record and owns 100 percent of the issued and outstanding capital stock of PPI, equivalent to Three Million Six Hundred Thousand (3,600,000) common shares of stock with a par value of Ten Pesos (P10.00) per share, or an aggregate par value of Thirty Six Million Pesos (P36,000,000), and Five Hundred Ninety Three Thousand Nine Hundred Ninety-Nine (593,999) preferred shares of stock with a par value of Five Hundred Pesos (P500.00) per share, or an aggregate value of Two Hundred Ninety Nine Million Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P299,999,500.00); that CTIL likewise is the stockholder of record and owns 40 percent of the issued and outstanding capital stock of LRC, equivalent to Four Hundred Thousand (400,000) common shares of stock with a par value of Thirty Pesos (P30.00) per share, equivalent to Twelve Million Pesos (P12,000,000.00); that on May 25, 2001, CTIL and Dogi executed two Deeds of Absolute Sale of Shares of Stock whereby the former, for and in consideration of the respective amounts of 10,500,000.00 and 500,000.00, sold, transferred and conveyed to the latter its aforementioned shares in PPI and LRC. In reply, please be informed that Article 12 of the RP-UK tax treaty provides as follows: "Article 12 "Gains from the Alienation of Property 1. Capital 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. Capital 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. 3. Notwithstanding the provisions of paragraph (2) of this Article, capital gains derived by a resident 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 and aircraft shall be taxable only in that Contracting State. 4. Capital gains from the alienation of any property other than those mentioned in paragraphs (1), (2) and (3) of this Article shall be taxable only in the Contracting State of which the alienator is a resident . (Emphasis supplied) 5. The provisions of paragraph (4) of this Article shall not affect the right of a Contracting State to levy according to its own law a tax on capital gains from the alienation of movable property derived by an individual who is a resident of the other Contracting State and has been a resident of the first-mentioned Contracting State at any time during the six years immediately preceding the alienation of the property." Based on the aforequoted provisions, capital gains from the alienation of property other than those mentioned in paragraphs 1, 2 and 3 thereof shall be taxable only in the State where the alienator is a resident. Inasmuch as the alienation of shares of stock is not among those mentioned in said paragraphs 1, 2 and 3, the gains that may be derived by CTIL, a resident of United Kingdom, from the sale of its shares of stock in LRC and PPI to Dogi are taxable only in the United Kingdom and therefore exempt from capital gains tax imposed under Section 28(b)(5)(c) of the National Internal Revenue Code of 1997. (BIR Ruling No. ITAD-29-00 dated April 16, 2001) However, the two Deeds of Absolute Sale of Shares of Stock shall be subject to the documentary stamp tax imposed under Section 176 of the National Internal Revenue 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