Revising the Rates of Capital Gains Tax on Certain Sales of Shares of Stock

September 10, 2009 DA ITAD BIR RULING NO. 085-09 Article 10 (Dividends); Philippines-Netherlands tax treaty; BIR Ruling No. DA-ITAD 99-08 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated February 12, 2008, requesting confirmation that dividends to be paid by Axia Power Holdings Philippines Corporation (Axia Philippines) to Axia Power Holdings B.V. (Axia Netherlands) are subject to income tax at the rate of 10 percent, based on the gross amount thereof, 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) . 1 Basic Facts It is represented that Axia Netherlands is a corporation organized and existing under the laws of the Netherlands based on the Amendment to the Articles of Association of Axia Netherlands; that the objects of Axia-Netherlands are (a) to conduct, participate in, collaborate with, and finance the management of companies and other enterprises, and to provide advice and other services, (b) to acquire, exploit, and sell tangible and intangible properties and other property rights, including industrial and intellectual property and real property, (c) to invest funds by providing loans or by making contributions to capital, (d) to provide security for the debts of, and to grant guarantees to, legal persons and other companies, and (e) to perform acts connected with or in furtherance of the foregoing activities; that the authorized capital of Axia Netherlands is 90,000 Euros, divided into 900 shares, each with a par value of 100 Euros; that Axia Netherlands is situated at 1077 XX Amsterdam, Strawinskylaan 1025, the Netherlands, and that its Articles of Association were filed at the Trade Register of the Netherlands under No. 34109067; that Axia Netherlands is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership dated February 20, 2008, issued by the Securities and Exchange Commission (SEC); that, on the other hand, Axia Philippines is a corporation organized and existing under the laws of the Philippines and registered with the SEC under SEC Registration No. CS200501546, based on the Certificate of Filing of Amended Articles of Incorporation of Axia Philippines issued by the SEC dated November 16, 2006; that Axia Philippines is situated at the 3rd Floor, Bonifacio Technology Center, 31st corner 2nd Avenues, Crescent Park West, Bonifacio Global City, Taguig City, Philippines; and that based on the notarized General Information Sheet of Axia Philippines for the period ending December 31, 2006, as prepared by the Corporate Secretary of Axia Philippines on April 25, 2007, and notarized on April 27, 2007, Axia Netherlands holds 99.99 percent of the common shares of stock and 100 percent of the preferred shares of stock of Axia Philippines amounting to PHP225,100.00 and PHP59,932,200.00, respectively, each with a par value of PHP100.00. It is further represented that, as evidenced by the Minutes of the Special Meeting of the Board of Directors of Axia Philippines dated January 21, 2008, and by the Certificate issued by the Corporate Secretary of Axia Philippines dated January 31, 2008 (and notarized on the same date), the Board of Directors of Axia Philippines have declared cash dividends amounting to 17,041.8838 per share in favor of all stockholders of record of Axia Philippines as of December 31, 2007, payable immediately. Ruling A. On income tax In reply, please be informed that a foreign corporation like Axia Netherlands, whether or not engaged in trade or business in the Philippines, is taxable only on income derived in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 (Tax Code of 1997) provides: AICDSa "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." In relation thereto, Section 28 (B) (1) and (5) (b) of the Tax Code of 1997 (as amended by Republic Act No. 9337 ) 2 provides: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c). Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." cIDHSC xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. xxx xxx xxx (b) Intercorporate Dividends. A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57(A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%), which represents the difference between the regular income tax of thirty-five percent (35%) and the fifteen percent (15%) tax on dividends as provided in this subparagraph; Provided, That effective January 1, 2009, the credit against the tax due shall be equivalent to fifteen percent (15%), which represents the difference between the regular income tax of thirty percent (30%) and the fifteen percent (15%) tax on dividends;" However, any income derived by Axia Netherlands in the Philippines may be exempt from income tax in the Philippines; (or partially exempt from income tax if subject only to a reduced income tax rate) if such income is exempt (or partially exempt ) pursuant to a treaty obligation binding upon the Philippine government. Section 32 (B) (5) of the Tax Code of 1997 provides: "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: IAcTaC xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty that may be invoked by Axia Netherlands and all other residents of the Netherlands, there is the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 of this tax treaty below rule on the taxation of dividends arising in the Philippines and derived by a resident of the Netherlands, thus: "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; DEacIT b) 15 per cent of the gross amount of the dividends in all other cases. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. 6. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of one of the States, carries on business in the other State, of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other State professional services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 7. If a resident of one of the States has a permanent establishment in the other State, this permanent establishment may be subject to an additional tax on the profits remitted by that permanent establishment to its head office in accordance with the law of the last-mentioned State, but the additional tax so charged shall not exceed 10 per cent of the amount of the remitted profits. This provision shall not apply to profits mentioned in Article 8. AIDTHC 8. Where a company which is a resident of one of the States derives profits or income from the other State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State." Under paragraph 2, dividends arising in the Philippines and derived by a resident of the Netherlands may be subject to income tax in the Philippines at a rate not to exceed (a) 10 percent of the gross amount of the dividends if the recipient thereof is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends, and (b) 15 percent of the gross amount of the dividends in all other cases. However, under paragraph 6, if the recipient of the dividends has a permanent establishment in the Philippines and the dividends are effectively connected with such permanent establishment, the preferential rates under paragraph 2 above will not apply, but the dividends will be subject to the provisions of Article 7 of the Philippines-Netherlands tax treaty on business profits. Accordingly, since Axia Netherlands has no permanent establishment in the Philippines and since it is a company whose capital is divided into shares and that it holds directly at least 10 percent of the capital of Axia Philippines, such dividends to be paid by Axia Philippines to Axia Netherlands, pursuant to the Special Meeting of the Board of Directors of Axia Philippines on January 21, 2008, are subject to income tax at the rate of 10 percent, based on the gross amount of the dividends. (BIR Ruling No. DA-ITAD 99-08 dated November 17, 2008) 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. THCASc Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. Signed on March 9, 1989, and effective January 1, 1992. 2. Entitled An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 238 of the National Internal Revenue Code of 1997, as Amended, and for Other Purposes , which was signed into law on May 24, 2005, and effective November 2005.