ITAD Ruling No. 157-02

September 13, 2002 ITAD RULING NO. 157-02 RP-Netherlands Tax Treaty Art. 10 & 13 Sec. 28 (B) (5) (c) of Tax Code of 1997 ITAD Ruling No. 50-01 Siguion Reyna Montecillo & Ongsiako 8741 Paseo de Roxas, Citibank Center Makati City Attention: Mr. Jose Lis C. Leagogo Ms. Catherina M. Fernandez Gentlemen : This refers to your letter dated September 19, 2001 requesting confirmation of your opinion as follows: (a) the transfer of shares of Lowe, Lintas & Partners, Inc. (LLP) from Lintas Holding B.V. (LHBV) to Lowe Worldwide Holdings B.V. (LWBV) pursuant to a merger is not subject to capital gains tax but subject to documentary stamp tax; and (b) the cash dividends paid by LLP to LWBV are subject to the preferential tax rate of 10% under the RP-Netherlands tax treaty. It is represented that LHBV is a non-resident foreign corporation organized in accordance with the laws of the Netherlands with principal office at 3016 CL Rotterdam, Westerkade 3, Netherlands; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated July 11, 2000; that it is the registered owner of 525,000 shares amounting to P5,250,000 which represent 30% of the issued and outstanding capital stock of LLP; that LWBV is a non-resident foreign corporation organized and existing under the laws of the Netherlands with principal office at 1043 DV Amsterdam, Orlyplein 147E, 4th floor, the Netherlands; that LLP is a corporation organized and existing under the laws of the Philippines with principal office at 15th, 16th and 17th Floors, Rufino Pacific Tower, 6784 Ayala Avenue, Makati City; and that on May 31, 2000, LHBV executed a Share Transfer Agreement of its 525,000 shares amounting to P5,250,000 in LLP in favor of LWBV. In reply, please be informed of the following pertinent provisions of the RP-Netherlands tax treaty: On Capital Gains "Article 13 "GAINS FROM THE ALIENATION OF PROPERTY "1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the State in which each 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 one of the States has in the other State, or of movable property pertaining to a fixed base available to a resident of one of the States in the other State for the purpose of performing professional services, including such gains from the alienation of such permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in the other State. ETaHCD "3. Notwithstanding the provision of paragraph 2, gains derived by an enterprise of one of the States 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. "4. Gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3, shall be taxable only in the State of which the alienator is a resident. xxx xxx xxx" On Dividends "Article 10 "DIVIDENDS "1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. "2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. "3. . . . "4. . . . "5. The 'dividends' as used in this Article means income from shares, 'jouissance' or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx xxx xxx" Under Article 13 of the RP-Netherlands tax treaty, it is clear that 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. Considering that the alienation of shares of stock is not among those mentioned in said paragraphs 1, 2 and 3, this office is of the opinion and so holds that the gains that may be derived by LHBV, a resident of the Netherlands, from the sale of its shares of stock in LLP to LWBV are taxable only in the Netherlands and, therefore, exempt from the capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997. (ITAD Ruling No. 50-01 dated May 28, 2001) Moreover, your opinion that the payment of dividends by LLP to LWBV, as successor-in-interest of LHBV and as the beneficial owner of the shares representing 30% of the issued and outstanding capital stock of LLP pursuant to the merger, as evidenced by the Secretary's Certificate dated September 21, 2001, is subject to preferential tax rate of 10% is hereby confirmed. However, the said Share Transfer Agreement evidencing the sale shall be subject to documentary stamp tax in accordance with Section 176 of the Tax Code of 1997. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be discovered 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service