ITAD Ruling No. 161-03

October 27, 2003 ITAD RULING NO. 161-03 RP-Norway, Article 13 Section 40 (6) (c) NIRC BIR Ruling No. DA-ITAD 32-03 Sycip, Salazar, Hernandez & Gatmaitan SycipLaw-All Asia Capital Center 105 Paseo de Roxas, Makati City Attention: Atty. Carina C. Laforteza Atty. Rena M. Rico Gentlemen : This refers to your application for relief from double taxation dated July 12, 2002 on behalf of your client, Westfleet Management AS (Westfleet), requesting confirmation that the gains to be realized from the sale by Westfleet of its shares of stock in KGJS Fleet Management Manila, Inc. (KGJS Manila), formerly known as Westfleet Philippines AS, to Kristian Gerhard Jebsen Skipsrederi AS (KGJS Norway) shall not be subject to Philippine income tax pursuant to Article 13 of the RP-Norway tax treaty. It is represented that Westfleet is a corporation duly organized and existing under the laws of the Kingdom of Norway, with principal office located at Folke Berniladottesvei 38, 5147 Fyllingdalen, Norway; 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 May 20, 2002; that it owns 1,999 shares representing 19.99% of the subscribed capital stock of KGJS Manila with par value of P100, amounting to P199,999; that KGJS Manila is a corporation organized and existing under the laws of the Republic of the Philippines, with principal office address at 6th Floor, Rufino Plaza Tower, Ayala Avenue, Makati City; that on April 1, 1997, an Agreement was executed by and between Westfleet and KGJS Norway, whereby Westfleet agrees to sell and transfer its shares in KGJS Manila to KGJS Norway; that the purchase price of the shares is based, on the book value, i.e ., NOK 56,512; that settlement of the shares is fixed on the April 1, 1997 and KGJS Norway shall pay 4% interest for the period beginning January 1 to April 1, 1997, amounting to NOK565 and the total amount of NOK57,077 is due for payment April 1, 1997, together with settlement for other outstanding items. In reply, please be informed that Article 13 of the RP-Norway tax treaty provides as follows: Article 13 CAPITAL GAINS "1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State. EHACcT "2. Gains form 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 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 with the whole enterprise) or of such fixed base, may be taxed in that other State. "3. Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident. "4. Gains from the alienation of any property other than those referred to in paragraphs 1, 2, and 3 shall be taxable only in the Contracting State of which the alienator is a resident. "5. The provisions of paragraph 4 shall not affect the right of each of the Contracting States to levy according to its own law a tax on gains from the alienation of shares forming a part of a substantial interest in a company which is a resident of the State. xxx xxx xxx." According to paragraph 4 of the aforequoted Article, gains from the alienation of property other than: (a) immovable (real) property; (b) movable (personal) property forming part of the business property of a permanent establishment of an enterprise or of a fixed base used for performing professional services of an individual; and (c) ships or aircrafts (and movable property related thereto), arising in the Philippines shall be taxable in Norway. However, paragraph 5 states that the Philippines may tax the gains derived by a Norwegian corporation from the disposition of its shares in a Philippine corporation forming part of a substantial interest in the latter. Since nothing in the RP-Norway tax treaty categorically defines the term "substantial interest", we take cognizance of Article 3(2) thereof, to wit: " As regards the application of the Convention by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of the State concerning the taxes to which the Convention applies ." In this light, the term "substantial interest" has to be understood under Philippine domestic law and jurisprudence. Thus, an interpretation of the term "substantial interest" may be drawn from various Philippine laws. Accordingly, Section 40(6)(c) of the Tax Code of 1997 provides, Section 40. Determination of Amount and Recognition of Gain or Loss. . . . 6. Definition . . . (c) The term "control" when used in this Section, shall mean ownership of stock in a corporation possessing at least fifty-one percent (51%) of all classes of stocks entitled to vote. In view of the above, and consistent with the policy adopted by this Bureau in a long line of BIR Rulings relative to the issue at hand, "substantial interest" is analogous with "control" which means participation representing at least fifty-one per cent (51%) ownership interest in a corporation. Categorically, substantial interest means having fifty-one (51%) ownership in a corporation. ( BIR Ruling No. DA-ITAD 32-02 dated March 22, 2002 ) Such being the case, since Westfleet shares of stock in KGJS Manila represent only 19.99% of the capital stock of the latter and therefore does not represent a substantial interest in KGJS Manila as discussed above, the sale by Westfleet of its shares of stock in KGJS Manila to KGJS Norway is exempt from capital gains tax imposed under Section 28(b)(5)(C) of the Tax Code of 1997, pursuant to Article 13(5) of the RP-Norway tax treaty. However, the Agreement shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. Finally, a certificate of authority to register the subject transaction in the books of KGJS Manila must be secured. Thus, Westfleet, while not required to pay capital gains tax, is required to file a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Agreement and this ruling, with Revenue District Office No. 39 South Quezon City (RDO 39), for the issuance of a Certificate Authorizing Registration (CAR) of the subject shares of stock in favor of KGJS Norway. ( BIR Ruling No. ITAD 44-00 ) cSEaDA 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 parties herein are concerned. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service