ITAD Ruling No. 191-02

October 29, 2002 ITAD RULING NO. 191-02 RP-France, Article 13 BIR Ruling No. ITAD 201-00; 145-00 Quisumbing & Torres 11th Floor, Pacific Star Bldg. Makati City, Philippines Attention: Ms. Natividad B. Kwan Ms. Anna Marie M. Sencio Gentlemen : This refers to your application for relief from double taxation dated February 14, 2002, on behalf of Suez [formerly known as Suez Lyonnaise Des Eaux (SLDE) and Lyonnaise des Eaux (LDE)], requesting confirmation of your opinion that the transfer by Suez of its shares of stock in Maynilad Water Services, Inc. (MWSI) to Ondeo Services (Ondeo), is exempt from Philippine income tax pursuant to Article 13 of the RP-France tax treaty. It is represented that Suez is a holding company and a non-resident foreign corporation organized and existing under the laws of France with principal address at 16 Rue De La Ville L'Eveque, Paris France 75008; 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 dated January 10, 2002 issued by the Securities and Exchange Commission (SEC); that Suez does not have a permanent establishment in the Philippines; that MWSI (formerly Benpres-Lyonnaise Waterworks, Inc.) is a domestic corporation, duly organized and existing under the laws of the Philippines and registered with the SEC; that MWSI is engaged primarily in the business of operating, managing, maintaining and rehabilitating waterworks, sewerage and sanitation systems and services, specifically, for the distribution, supply and sale of potable water to domestic, commercial and industrial users in the service areas of Metropolitan Water and Sewerage System (MWSS); that the Corporate Secretary's Certificate dated December 28, 2001 alleged that SLDE (now known as Suez), a registered shareholder of MWSI, holds 10,480,000 Class "B" shares with a par value of P100 per share amounting to One Billion Forty Eight Million/Pesos; that Ondeo is non-resident foreign corporation organized and existing under the laws of France with office address at 18 Square Edward VII 75009 Paris, France; that on December 14, 2001, a Deed of Assignment of Shares was entered into by and between Suez and Ondeo, whereby Suez transfers all its 10,480,000 class B shares of stock in MWSI to Ondeo. 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. xxx xxx xxx" "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. Applying the aforequoted provision, the gains derived by Suez from the transfer of its shares of stock in MWSI to Ondeo is generally taxable in France. However, paragraph 1 of the same Article grants the Philippines the right to 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. (a) and (b), Revenue Regulations No. 4-86) Verification of the December 31, 2001 Audited Financial Statements of MWSI disclosed that its real property interests located in the Philippines are valued at P8,570,942,755.98, representing forty four percent (44%) of its total assets of P19,408,069,000, thereby making the assets of MWSI not consisted principally of real property interest located in the Philippines. Accordingly, this office is of the opinion and so holds that the transfer by Suez of its share of stock in MWSI to Ondeo is exempt from Philippine income tax pursuant to Article 13 of the RP-France tax treaty. ( BIR Ruling No. ITAD 201-00 ) However, a certificate of authority to register the said transaction in the books of MWSI must be secured. Thus, MWSI is required to file a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Deed of Assignment of Shares 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 of Suez in favor of Ondeo. (BIR Ruling No. ITAD 145-00) Upon presentation of the aforesaid Capital Gains Tax Return as filed, the CAR, as well as the proof of payment of the documentary stamp tax due thereon, the corporate secretary of MWSI shall be authorized to register the transfer of said shares from Suez to Ondeo in the Stock and Transfer Book of the MWSI and to issue a new certificate in the name of Ondeo. IcEACH Moreover, the Deed of Assignment executed by and between Suez and Ondeo for the sale of the said shares of stocks in MWSI shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. This ruling is issued on the basis of the foregoing representations. However, if upon investigation it will be disclosed or 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