BIR Ruling [DA-118-97]

March 20, 1997 BIR RULING [DA-118-97] Joaquin Cunanan & Co. 8th Floor BA Lepanto Building Paseo de Roxas Makati City Attention: Atty . George T . J . Lavadia Principal Gentlemen : This refers to our letter dated April 09, 1996 requesting confirmation of your opinion that the royalties paid by your client, Armedic Philippines, Inc. to Servier International B. V. (SIB), a Netherland Franchisor is subject only to 15% royalty tax pursuant to the RP-Netherlands Tax Treaty. It is represented that API is a domestic corporation, which entered into a Franchise Agreement with SIB, a foreign pharmaceutical corporation domiciled in Netherlands, whereby the latter granted to the former the exclusive license to use SIB's trademark, logo and Servier System in the Philippines; that in consideration for the appointment, SIB is entitled to receive a royalty equivalent to 1% of API's net sales payable quarterly and that SIB is not engaged in trade or business in the Philippines, and that as such, the licensee fees are in the nature of royalties. In reply, please be informed that Article 12(2) (b) of the RP-Netherlands Tax Treaty, provides, viz: "Article 12 "ROYALTIES "1. Royalties arising one of the States and paid to a resident of the other State may be taxed in that other State. "2. However, such royalties may also be taxed in that State in which they arise and according to the laws of the State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: cdpr "(a) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in that State; and "(b) 15 per cent of the gross amount of the royalties in all other cases. In the instant case, SIB is a foreign non-resident corporation and is not engaged in trade or business in the Philippines as envisioned under Section 25 (b) of the Tax Code, as amended; and as such, the licensee fees are in the nature of royalties subject to tax at a rate or 15% applying the aforequoted provision or Article 12(2) (b) of the RP-Netherlands Tax Treaty. Such being the case, your opinion that the royalties paid for the license to use SIB's trademark, logo and Servier System in the Philippines are subject to the royalty rate of 15% as prescribed under Article 12(2) (b) of the RP-Netherlands Tax Treaty is hereby confirmed. (BIR Ruling No. 26-94 January 21, 1994) prcd Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head, Revenue Executive Assistant (Legal Service)