ITAD Ruling No. 228-02

December 27, 2002 ITAD RULING NO. 228-02 RP-Japan, Article 13 BIR Ruling No. DA-ITAD 72-02 Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center, 6766 Ayala Avenue Makati City, Philippines Attention: Atty. Romeo H. Duran Tax Director Gentlemen : This refers to your application for relief from double taxation dated June 10, 2002, on behalf of your client, Fujitsu International Engineering, Ltd. (FIE), requesting confirmation of your opinion that the gains to be realized from the transfer of shares of stocks by FIE in Fujitsu Systems Philippines, Inc. (FTSP) to Fujitsu Network Solutions, Ltd. (FNETS) [formerly Fujitsu System Construction, Ltd. (FJSC)], shall not be subject to Philippine income tax pursuant to the RP-Japan tax treaty. aIcDCH It is represented that FIE is a corporation duly organized and existing under the laws of Japan with principal office address at 1-403, Kosugi-cho, Nakahara-ku, Kawasaki City, Japan; 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 3, 2002; that FIE is the stockholder of record of 200,000 shares of common stock with a par value of P100 per share amounting to P20,000,000.00 in FTSP; that FTSP is a corporation organized and existing under the laws of the Philippines with business address at Unit 2402-B, 24/F, East Tower, Philippine Stock Exchange Centre, Ortigas Complex, Pasig City, Philippines; that FJSC (now FNETS) is a corporation duly organized and existing under the laws of Japan, with office address at 6-22-7, Minami-oi, Shinagawa-ku, Tokyo, Japan; that on August 9, 2001 FIE and FJSC entered into a Division Agreement wherein it was agreed that FIE shall spin-off, and FJSC shall absorb and succeed to the business of FIE relating to nodes, transmission, mobile wireless system development, construction and technical support (referred to as the "Business"; that it was likewise agreed that FJSC shall, upon succession to the "Business", change its name to FNETS; that upon effectivity of the contract on October 1, 2001, FJSC shall succeed to the rights and obligations of FIE including FIE's assets and liabilities, rights and obligation incidental thereto, business agreements, employment contracts and labor agreements, and shall be renamed FNETS; and that among the assets that will be transferred from FIE to FNETS are FIE's shares of stocks in FTSP valued at JP 59,880,240 or equivalent to 200,000 shares at P100.00 par value amounting to P20,000,000.00. In reply, please be informed that Article 13 of the RP-Japan tax treaty provides that: "Article 13 Gains from the Alienation of Property "1. Gains derived by a resident of a Contracting State from the alienation of immovable property as defined in paragraph 2 of Article 6 and situated in the other Contracting State may be taxed in that other Contracting State. "2. Gains from the alienation of any property, other than immovable 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 any property, other than immovable 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 that other Contracting State. "3. Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic and any property, other than immovable property; pertaining to the operation of such ships or aircraft shall be taxable only in that Contracting State. "4. Gains from the alienation of shares of a company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State. "5. Gains from the alienation of any property other than those referred to in paragraphs (1), (2), (3), and (4) shall be taxable only in the Contracting State of which the alienator is a resident. xxx xxx xxx" In the instant case, the gains which will be realized by FIE from the transfer of its shares of stock in FTSP to FNETS shall be taxable in Japan. However, based on paragraph 4 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. (a) and (b), Revenue Regulations No. 4-86 ). ETIcHa Verification of the 2001 and 2002 Audited Financial Statement of FTSP disclosed that its real property interest located in the Philippines represents less than 50% of its total assets, thereby making the assets of FTSP not consisted principally of real property interest located in the Philippines. Consequently, this Office of the opinion and so holds that the gains derived by FIE shall be taxable only in Japan since, pursuant to paragraph 4 of the said Article, "any capital gains from the alienation of any property, other than those mentioned in paragraph 1, 2 and 3 of Article 13 of the RP-Japan tax treaty shall be taxable only in the Contracting State of which the alienator is a resident". (BIR Ruling No. DA-ITAD 72-02 dated April 30, 2002). Accordingly, your opinion that the gains from the transfer of shares of stock by FIE to FNETS are not subject to capital gains tax is hereby confirmed. Furthermore, a certificate of authority to register the said transaction in the books of FTSP must be secured. Thus, FIE 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 of FIE in favor of FNETS. Moreover, the Division Agreement executed by and between FIE and FNETS for the sale of shares of stocks shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service