June 29, 2005

ITAD RULING NO. 065-05

Article 13, Philippines-Japan Tax Treaty;

Section 73 and 176, Tax Code of 1997; BIR
Ruling No. 39-02; ITAD 201-02; ITAD 228-02

Aranas Consunji Barleta & Co.

Grd. Flr., Le Metropole Bldg.
Dela Costa cor. Tordesillas Sts.
Salcedo Village, Makati City

Attention: Atty. Casey M. Barleta

Tax Services

Gentlemen :

This refers to your application for relief from double taxation dated May 24,
2005, on behalf of your client Allen Arthur (Manila), Inc. (Allen Arthur), requesting
con rmation of your opinion that any gain to be derived from liquidating dividends to
be declared in favor of Aderans Company, Ltd. ( Aderans Company), the sole
shareholder of Allen Arthur, as an offshoot of the dissolution of Allen Arthur, is exempt
from Philippine income tax under Article 13 of the Philippines-Japan tax treaty.
It is represented that Aderans Company is a company organized and existing
under the laws of Japan with business address at 1-6-3 Shinjuku, Shinjuku-ku, Tokyo,
Japan; that it is not registered either as a corporation or as a partnership in the
Philippines per Certi cate issued by the Securities and Exchange Commission dated
May 5, 2005; that Allen Arthur is a domestic company and a wholly-owned subsidiary of
Aderans Company, incorporated on August 26, 1976; that it is engaged in the
manufacture and exportation of hairpieces and related accessories; that effective
March 31, 2004, Allen Arthur ceased operations and started winding down its business
in preparation for its eventual dissolution by way of shortening its corporate life; and
that it intends to distribute its net assets by declaring liquidating dividends in favor of
Aderans Company.
In reply, please be informed that the tax treatment of liquidating dividends
depends on the characterization of the income in the form of such dividends received
by shareholders as a result of the dissolution of the corporation in which they hold
shares.
The second paragraph of Section 73(A) of the Tax Code of 1997 states: "Where a
corporation distributes all of its assets in complete liquidation or dissolution, the gain
realized or loss sustained by the stockholder, whether individual or corporate, is a
taxable income or a deductible loss, as the case may be."
In relation thereto, the decision in the case of Wise & Co., Inc., et al., vs. Bibiano L.
Meer, Collector of Internal Revenue (78 Phil 655 [1947]), the Supreme Court, in
interpreting a similarly worded provision as above cited as in Section 25(a) of Act No.
2833 ("Income Tax Law"), as amended by Section 4 of Act No. 3761 [which is partially
lifted from Section 201(c) of the US Revenue Act of 1918], adopted the judicial
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 construction of the US Supreme Court in the case of Hellmich vs. Hellman (276 US
233), where it was held that the amounts distributed in the liquidation of a corporation
shall be treated as payments in exchange for stock or shares, and any gain or pro t
realized thereby shall be taxed to the distributee as other gains or pro ts. The Supreme
Court also stated that "(W)hen the corporation was dissolved and in the process of
complete liquidation and its shareholders surrendered their stock to it and it paid the
sums in question to them in exchange, a transaction took place, which was no different
in its essence from a sale of the same stock to a third party who paid therefor".
Therefore, liquidating gain is to be treated in the same manner as a gain from the
sale or exchange of shares, consistent with the decision of the Supreme Court in Wise &
Co., Inc., and as such is subject to the ordinary income tax rates provided under
Sections 24(A)(1), 25(A)(1) and (B) [that is, the 25% rate], 27(A) or (E), 28(A)(1) or (2)
and (B)(1) of the Tax Code of 1997, depending on the status of the
shareholder/stockholder (for instance, whether the shareholder is a corporation or an
individual, resident or non-resident). (BIR Ruling No. 39-02 dated November 11, 2002)
However, Article 13 of the Philippines-Japan Tax Treaty provides:
Article 13
1. Gains derived by a resident of a Contracting State from the alienation
of immovable property as de ned 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 xed 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 xed 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 tra c 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.
Based on paragraph 1 above, gains which will be realized by Aderans Company
arising from the declaration of dividends by Allen Arthur, as a consequence of the
latter's dissolution, are taxable in Japan. On the other hand, under paragraph 4, as
aforequoted, 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. (BIR Ruling No.
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 ITAD 228-02)
Veri cation of the Audited Financial Statement of Allen Arthur as of March 31,
2004 and December 31, 2003 disclosed that its real property interest located in the
Philippines represents less than 50% of its total assets. Thus, assets of Allen Arthur are
considered as not consisting principally of real property interest located in the
Philippines.
In view of the foregoing, this O ce is of the opinion and so holds that the gains
derived by Aderans Company 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 Philippines-
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 Allen Arthur to Aderans
Company are not subject to capital gains tax is hereby confirmed. SCaTAc

Finally, the transaction is subject to the documentary stamp tax imposed under
Section 173 in relation to Section 175, of the Tax Code of 1997, as amended.
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.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service

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