ITAD Ruling No. 114-01

November 8, 2001 ITAD RULING NO. 114-01 RP-France, Art. 13; Sec. 176, Tax Code of 1997 BIR Ruling No. ITAD-38-00 Quisumbing & Torres Law Office 11th Floor, Pacific Star Bldg. Makati Ave. corner Sen. Gil J. Puyat Ave. Makati City 1200 Attention: Atty. Jose R. Sandejas and Atty. Jose Jaime V. Cruz Gentlemen : This refers to your letter dated March 26, 2001 on behalf of your client, Suez Lyonnaise Des Eaux (SLDE), requesting confirmation of your opinion that the capital gains derived by SLDE from the sale of shares of the capital stock of Lyonnaise Des Eaux Philippines, Inc. (LDEP) to Lyonnaise des Eaux (LDE) are exempt from the payment of capital gains tax pursuant to Article 13 of the RP-France Tax Treaty. It is represented that SLDE is a non-resident foreign corporation duly organized and existing under the laws of France with office address at 1 rue d" Astorg 75008 Paris; that it is not registered either as a corporation/partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated February 1, 2001; that LDEP is a corporation organized and existing under the Philippine laws with office address at Units 801 and 802, 8 th Floor, The Taipan Place, Emerald Avenue, Ortigas Centre, Pasig City; that LDE is a non-resident foreign corporation duly organized and existing under the laws of France with office address at 18, square Edouard VII 75009 Paris; that as of December 31, 2000, SLDE is the stockholder of record of one hundred percent (100%) of the outstanding capital stock of LDEP equivalent to 52,800 shares with a par value of P100.00 per share; that on the same date, SLDE assigned its LDEP's 52,800 shares in favor of LDE. 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." Under the aforequoted provisions, capital gains derived by SLDE from the transfer of its shares of stock in LDEP to LDE is generally taxable in France. However, paragraph 1 of the same 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. "Real Property Interest" means 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 2000 Audited Financial Statement of LDEP disclosed that its net property and equipment located in the Philippines is valued at Php9,003,126 representing only 7.92% or less than fifty percent (50%) of its total assets of Php113,611,585, thereby making the assets of LDEP not consisted principally of real property interest located in the Philippines. Accordingly, your opinion that the assignment and transfer by SLDE of its shares in LDEP to LDE is not subject to Philippine income tax is hereby confirmed. However, a certificate of authority to register the said transaction in the books of LDEP must be secured. Thus, SLDE, being a nonresident foreign corporation, is not required to pay the capital gains tax, but 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. 51 Pasay in order for the latter to issue a Certificate Authorizing Registration of the said shares of stock in favor of LDE. Moreover, the Deed of Assignment of Shares shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. (BIR Ruling No. ITAD 38-00 dated February 4, 2000) Upon presentment of proof of payment of the documentary stamp tax, the Corporate Secretary of LDEP can register in the Stock and Transfer Book the shares from SLDE to LDE. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be 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