ITAD Ruling No. 153-00

October 25, 2000 ITAD RULING NO. 153-00 RP-Spain Article 13 Sec. 176 38-00 Abello Concepcion Regala & Cruz ACCRA Building, 122 Gamboa Street Legaspi Village, 0770 Makati City Attention: Atty . Aleli Angela G . Quirino Atty . Ruby Rose J . Yusi Atty . Ana Maria G . E . Javelosa Gentlemen : This refers to your letter dated May 31, 2000 requesting confirmation of your opinion to the effect that the assignment and transfer by your client, Union Fenosa Desarrollo Y Accion Exterior, S.A. (UFACEX) to Internacional Servicios Professionales, S.L. (Soluziona) of its shares in Iberpacific, Inc. (Iberpacific) is not subject to capital gains tax pursuant to the RP-Spain Tax Treaty. It is represented that UFACEX is a non-resident foreign corporation duly organized and existing under the laws of Spain; that it is not engaged in trade or business in the Philippines although it maintains a representative office therein; that UFACEX registered with the SEC under License No. A199910665 a representative office in the Philippines as per Certificate of Corporate Filing/Information dated June 6, 2000 issued by the Securities and Exchange Commission; that the said representative office was established in the Philippines to engage in the gathering and dissemination of information and promotion of the products and services of UFACEX and is prohibited under its license to derive any income in the Philippines; that Iberpacific is a corporation duly organized and existing under the laws of the Philippines; that Soluziona is a corporation duly organized under the laws of Spain; that UFACEX is the stockholder of record and owns forty nine and 99/100 percent (49.99%) of the issued and outstanding capital stock of Iberpacific, equivalent to Sixty Five Thousand Nine Hundred Ninety Five (65,995) shares of stock, with a par value of One Hundred Pesos (P100.00) per share, or an aggregate par value of Six Million Five Hundred Ninety-Nine Thousand Five Hundred Pesos (P6,599,500); and that on May 3, 2000, by virtue of the Deed of Assignment of Shares of Stock executed by UFACEX and Soluziona, UFACEX transferred, assigned and conveyed to Soluziona the aforementioned shares in Iberpacific. HTCaAD In reply, please be informed that Article 13 of the RP-Spain 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 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 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 shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State . Gains from the alienation of interest in a partnership or trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State . (emphasis supplied) "(4) Gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 shall be taxable only in the Contracting State of which the alienator is a resident ." (emphasis supplied) EcIDaA The gains which will be realized by UFACEX from the transfer of its shares of stock in Iberpacific to Soluziona shall be taxable only in Spain. However, under paragraph 3 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 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 1999 Audited Financial Statements of Iberpacific disclosed that its real property interest located in the Philippines is only 25.89% of its total assets, thereby making the assets of Iberpacific not principally consisted of real property interest located in the Philippines. Accordingly, your opinion that the assignment and transfer by Union Fenosa Desarrollo y Accion Exterior, S.A. (UFACEX) to Soluziona Internacional Servicios Profesionales, S.L. (Soluziona) of its shares in Iberpacific, Inc. (Iberpacific) is not subject to capital gains tax is hereby confirmed. (ITAD Ruling No. 38-00 dated February 4, 2000) However, the Deed of Assignment of Shares of Stock shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. This ruling is being issued on the basis of the facts as represented. However, if upon investigation, it will 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.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group