ITAD Ruling No. 141-05

November 18, 2005 ITAD RULING NO. 141-05 Sycip Gorres Velayo & Co . 6760 Ayala Avenue, 1226 Makati City Attention: Atty. R.C. Vinzon Partner, Tax Services Gentlemen : This refers to your application for relief from double taxation dated May 25, 2005, on behalf of your client, P-Four, Inc. (P4), requesting confirmation of your opinion that the liquidating dividend to be distributed/remitted by P4 to its majority stockholder, Amkor International Holdings LLC (AIH), shall not be subject to the Philippine income/capital gains tax pursuant to Article 14 of the Philippines-United States of America (Philippines-US). It is represented that AIH is a limited liability company organized and existing under the laws of the State of Delaware in United States of America with business address at Corporation Trust Center, 1209 Orange St., City of Wilmington, County of New Castle, USA; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated May 12, 2005; that P4 is a corporation duly organized and existing under the laws of the Philippines with principal office and place of business at Km. 22, East Service Road, South Superhighway, Muntinlupa City; that on June 15, 2005, amending the resolutions made during the meeting on April 18, 2005 in a Special Meeting of the Board of Directors of P4, it was unanimously resolved that the corporate existence of P4 be shortened from December 16, 2048 to April 30, 2005 and correspondingly amend Article 4 of its Articles of Incorporation to reflect the said amendment; that as of April 30, 2005, P4 has an outstanding capital stock of Eighteen Million pesos (P18,000,000.00) consisting of 180,000 common shares issued, the five individuals holding one (1) share each being all nominees of AIH as shown below: Shares Amount APIC Amkor International Holdings 179,995 P17,999,500 P10,791,702,609 Michael Santangelo 1 100 Atty. Renato Calma 1 100 Anthony Michael Petrucci 1 100 Evelyn Madrigal 1 100 Erico Delos Reyes 1 100 Total 180,000 P18,000,000 P10,791,702,609 that as of December 31, 2004, P4 has additional paid in capital (APIC) of P10,791,702,609.00; that all the assets of P4 as of December 31, 2004 consist of personal property; and that it was also resolved by the Board that after satisfaction of any valid claim of creditors, whatever net assets remaining upon dissolution of P4 will be distributed to its majority stockholders, AIH, as liquidating dividends. SEHaDI In reply, please be informed that Article 14 of the Philippine-US tax treaty provides as follows, viz: " Article 14 CAPITAL GAINS 1. Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which a resident of a Contracting State has in the other Contracting State or of tangible personal (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 independent personal 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 a resident of a Contracting State from the alienation of ships, aircraft or containers operated by such resident in international traffic shall be taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13. 2. Gains from the alienation of any property other than those mentioned in paragraph 1 or in Article 7 (Income from Real Property) shall be taxable only in the Contracting State of which the alienator is a resident. Furthermore, the Reservation Clause of the same treaty provides, in part, as follows: " Article "Notwithstanding the provisions of Article 14 of the Convention relating to the capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of real property interest located in the country. Likewise, both countries may tax gain from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term 'real property interest' is to have the meaning it has under the law of the country in which the underlying real property is located." In addition, the annotations on the Corporation Code of the Philippines by Paras et. al., defines " liquidating dividends " as follows: "These are dividends that are declared when a corporation liquidates by redeeming its outstanding stock for cash, or by distributing its assets to stockholders in exchange for their stock. Such distribution is also known as distribution in liquidation. For tax purposes, liquidating dividends are treated, in effect, as sales of stock; hence any gain or loss to the stockholder is treated as capital gain or loss " It is clear from the aforequoted provisions that the distribution of the remaining net asset by P4 to its stockholder, AIH, in exchange for the latter's stock known as liquidating dividends is treated as sales of stock for tax purposes. Hence, any gain or loss to the stockholder is treated as capital gains which may be derived by AIH from the alienation of any property other than those mentioned in paragraph (I) of Article 14 of the Philippine-US tax treaty shall be taxable only in the State where the alienator is a resident. However, it is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consist principally of real property interest located in the Philippines. Verification of the audited financial statements ending December 2003 and 2004 of P4 disclosed that it has no real property interest located in the Philippines, thereby making the assets of P4 not principally consisting of real property interest located in the Philippines. Accordingly, this Office is of the opinion and so holds that any gain that may be realized as a result of distributing its liquidating dividends to its stockholders is not subject to the capital gains tax imposed under Section 28(B)(5)(c) of the National Internal Revenue Code (Tax Code) of 1997. However, this transaction is subject to documentary stamp tax pursuant to Sections 175 of the same Code as amended by Republic Act No. 9243 1 and implemented by Revenue Regulations No. 13-2004. ( BIR Ruling No. DA-ITAD 15-02 dated January 31, 2002 ) CaHAcT This ruling is issued based on the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service