REPUBLIC OF THE PHILIPPINES
DEPARTMENT OF FINANCE
BUREAU OF INTERNAL REVENUE.
Article 13 (Gains from the Alienation
of Property)
Philippines-Netherlands tax treat
BIR Ruling No. ITAD _03€-17
Date; November 9, 2017
ISLA LIPANA & CO.
29th Floor, Philamlife Tower
8767 Paseo de Roxas
Makati City
Attention: Ms. Roselle K. Yu
Executive Director, Tax
Ms. Chiara Feliz Gutierrez
Assistant Manager
Atty. Maria Isidra May Kintanar
Senior Consultant, Tax
Gentlemen:
This refers to your tax treaty relief application filed on January 3, 2014
requesting confirmation that any gain derived by Asia Outsourcing Netherlands BV
(‘Asia Outsourcing Netherlands’) from the redemption of redeemable preferred
Shares of stock held by it in Asia Outsourcing Philippines Holdings, Inc. (“Asia
Outsourcing Philippines”) is exempt from income tax pursuant to the Convention
between the Kingdom of the Netherlands and the Republic of the Philippines for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income (‘Philippines-Netherlands tax treaty’),
FACTS
Asia Outsourcing Netherlands is a foreign corporation and a resident of the
Netherlands based on its Deed of Incorporation and Declaration of Residence issued
by the Tax and Customs Administration of the Netherlands on November 25, 2013. It
isnot registered as a corporation or partnership in the Philippines based on the
Certification of Non-Registration of Company issued by the Securities and Exchange
Commission on October 23, 2013. On the other hand, Asia Outsourcing Philippines
is a domestic corporation organized and existing under Philippine laws.
Based on Asia Outsourcing Philippines’ Articles of Incorporation, General
Information Sheet, and Corporate Secretary's Certificates dated December 16, 2013,
Asia Outsoureing Netherlands is the registered owner of 191,494,839 redeemable
preferred shares of Asia Outsourcing Philippines under Stock Certificate No. 1
issued on April 22, 2013. These shares are acquired by original issuance.
On November 26, 2013, the Board of Directors of Asia Outsourcing
Philippines approved a resolution authorizing the redemption of 8,200,000 of those
shares at redemption price of 34.06 pesos per share. The redemption date is
December 17, 2013.
34.0008 Asia Outsourcing Netherlands BV Page 104
=a O88)?Based on Corporate Secretary's Certificate dated December 16, 2013, the
income subject of this ruling is not under investigation, on-going audit, administrative
protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or
Judicial appeal.
RULING
In reply, please be informed that under Section 28(B)(5\(c) of the National
Internal Revenue Code of 1997, as amended (“Tax Code”), net €apital gains derived by
a foreign corporation not engaged in trade or business in the Philippines is subject to
income tax at the rate of 5 or 10 percent:
“SEC. 28. Rates of Income Tax on Foreign Corporations. ~
xxx xxx xxx
(8) Tax on Nonresident Foreign Corporation. ~
(9) Tax on Certain Incomes Received by a Nonresident Foreign
Corporation. -
XxX XxX XxX
(¢) Capital Gains from Sale of Shares of Stock not Traded in the Stock
Exchange. = A final tax at the rates prescribed below is hereby imposed
upon the net capital gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the stock exchange:
Not Over P 100,000.
. z 5%
(On any amount in excess of 100,000.
10%"
However, under Section 32(B)(5) of the Tax Code, such gains are exempt or
Partially exempt to the extent required by any treaty obligation on the Philippines, to
wit:
“SEC. 32. Gross Income. -
xxx XxX XxX
(B) Exclusions from Gross Income. ~ The following items shall not be included
in gross income and shall be exempt from taxation under this Title:
(5) Income Exempt under Treaty. - Income of any kind, to the extent
required by any treaty obligation binding upon the Government of the
Philippines.”
Relative thereto, paragraph 4, Article 13 of the Philippines-Netherlands tax
treaty provides as follows:
icra itas Os 7 menaer“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 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 Contracting State of which
the alienator is a resident.”
Under paragraph 4 of Article 13, gains from the alienation of property other
than that referred to in paragraph 1 (immovable property), 2 (movable property
including a permanent establishment) or 3 (ships and aircraft) derived by a resident of
the Netherlands are taxable only in the Netherlands.
This being so, since alienation of shares of stock of a company is not among
those contemplated under paragraphs 1, 2 and 3 of Article 13, any gain derived by
Asia Outsourcing Netherlands from the redemption of the 8,200,000 redeemable
preferred shares held by it in Asia Outsourcing Philippines is exempt from capital
gains tax pursuant to paragraph 4, Article 13 of the Philippines-Netherlands tax
treaty.
Moreover, since the 191,494,839 redeemable preferred shares in Asia
Outsourcing Philippines are acquired by Asia Outsourcing Netherlands by original
issuance and not as stock dividends, any gain derived therefrom shall constitute as
capital gains and not taxable dividends as contemplated in Section 73 of the Tax Code
below:
“Sec. 73. Distribution of dividends or assets by corporations. —
(b) Stock dividends — A stock dividend representing the transfer of surplus to
capital account shall not be subject to tax. However, if a corporation cancels or
redeems stock issued as a dividend at such time and in such manner as to
make the distribution and cancellation or redemption, in_whole or in part,
essentially equivalent to the distribution of a taxable dividend, the amount so
distributed in redemption or cancellation of the stock shall be considered as
taxable income to the extent it represents a distribution of earnings or profits
accumulated after March first, nineteen hundred and thirteen.” (Emphasis
ours)
BIR Ralng
Netherlands BV Page 9 0f 4
OSs. 17In the case of stock dividends, they are in reality cash dividends since they are
taken out of the retained earnings of the declaring company. However, instead of cash
which might be important to the company, it temporarily issues stock dividends which
provides the recipients an ownership or additional ownership in the company.
Therefore, should these stock dividends be redeemed, they should be treated as
taxable dividends and not capital gains.
Finally, documentary stamp tax amounting to 30,750.00 pesos and processing
and certification fee amounting to 5,000.00 pesos are paid by Asia Outsourcing
Netherlands to the Bureau of Internal Revenue on January 2 and 3, 2014, as
evidenced by BIR Forms 2000-OT (Documentary Stamp Tax Declaration /Return) and
0605 (Payment Form) and corresponding bank receipts.
This ruling is issued on the basis of the facts as represented. However, if upon
investigation it shall be disclosed that the actual facts are different, then this ruling
shall be without force and effect insofar as the herein parties are concerned.
Very truly yours,
A roniston
CAESAR R. DULAY
Commissioner of Internal Revenue
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