ITAD Ruling No. 230-02

December 27, 2002 ITAD RULING NO. 230-02 Article 13, RP-Netherlands Section 176, NIRC BIR Ruling No. DA-ITAD-157-02; BIR Ruling No. DA-ITAD-68-02 Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, 1200 Makati City Attention: Atty. Romeo H. Duran Tax Principal Gentlemen : This refers to your letter dated September 17, 2002 on behalf of your client, U.S. Filter Finance B.V. (US Filter), requesting confirmation that any capital gains realized by US Filter from the sale of its shareholdings in Vivendi Water Systems Philippines, Inc. (Vivendi-Phils) to Vivendi Water Systems-France (Vivendi-France) are not subject to income tax, pursuant to Article 13 of the RP-Netherlands tax treaty, but the transfer transaction is subject to documentary stamp tax in the Philippines. caAICE It is represented that US Filter is a non-resident foreign corporation duly organized and existing under the laws of the Netherlands with principal office at Wattstraat 64, 2723 RD Zoetermeer, The 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 Certificate of Non-registration issued by the Securities and Exchange Commission (SEC) dated August 7, 2002; that Vivendi-Phils, on the other hand, is a corporation duly organized and existing under the laws of the Philippines formerly known as U.S. Filter Philippines, Inc.; that it has a total subscribed and paid-up capital of Five Million Two Hundred Thirty Two Thousand Pesos (Php5,232,000.00) consisting of Fifty Two Thousand Three Hundred Twenty (52,320) shares with a par value of One Hundred Pesos (Php100.00); that on December 18, 2001, US Filter and Vivendi-France, a non-resident foreign corporation organized and existing under the laws of France, executed a Share Purchase Agreement for the transfer of 52,312 shares of US Filter in Vivendi-Phils to Vivendi-France for a consideration of One U.S. Dollar (US$1.00) per share. Based on the above representations you now ask confirmation of the following: 1) Any capital gains derived by US Filter from the sale of its share of stocks in Vivendi-Phils to Vivendi-France are not taxable in the Philippines, pursuant to the RP-Netherlands tax treaty; 2) The share transfer transaction is subject to the payment of documentary stamp tax at the rate of P1.50 per P200.00 of the total par value or fractional part thereof of the subject shares; and 3) A Certificate Authorizing Registration of the said shares in favor of US Filter must be secured from RDO 39, which will authorize the Corporate Secretary of Vivendi-Phils to register the stockholdings from US Filter to Vivendi-France. In reply, please be informed that Article 13 of the RP-Netherlands tax treaty provides, viz : "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 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 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. "3. Notwithstanding the provisions 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. (Emphasis supplied) "5. The provisions of paragraph 4 shall not affect the right of each of the States to levy according to its domestic law a tax on gains from the alienation of any property derived by an individual who is a resident of the other State and has been a resident of the first-mentioned State at any time during the six years immediately preceding the alienation of the property." It is clear from the afore-cited provisions 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 instant case involves alienation of shares of stocks which is not among those mentioned in said paragraphs 1, 2 and 3 of the above mentioned provisions, this Office is of the opinion and so holds that the gains of US Filter from the sale of its shares of stocks in Vivendi-Phils to Vivendi-France 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. ( BIR Ruling No. DA-ITAD-157-02 dated September 13, 2002 ) However, the Share Purchase Agreement evidencing the sale shall be subject to documentary stamp tax at the rate of P1.50 on each P200.00, or fractional part thereof, of the par value of such subject shares imposed under Section 176 of the National Internal Revenue Code of 1997. Furthermore, a certificate of authority to register the said transaction in the books of Vivendi-Phils must be secured. Thus, US Filter is required to file a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Deed of Assignment 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 Vivendi-Phils in favor of Vivendi-France. ( BIR Ruling No. DA-ITAD-68-02 dated April 24, 2002 ) In fine, upon presentment of the Capital Gains Tax Return filed with the BIR, as above stated, the CAR, and the proof of payment of documentary stamp thereon, the corporate secretary of Vivendi-Phils shall be authorized to register the transfer of the shares from US Filter to Vivendi-France in the Stock and Transfer Book and to cancel and issue new certificates in the name of Vivendi-France. This ruling is issued on the basis of 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