BIR Ruling [DA-218-96]

June 28, 1996 BIR RULING [DA-218-96] Edsa Shangri-la Hotel & Resort, Inc. 10th Floor, Salustiana D. Ty Tower 104 Paseo de Roxas cor. Perea Street, Makati City Attention: Mr . Vicente T . Villegas Director/Treasurer Gentlemen : This refers to your letter dated June 25, 1996 stating that Edsa Shangri-la Hotel & Resort, Inc. and Mactan Shangri-la Hotel and Resort, Inc. (Borrowers) are corporations organized and existing under and by virtue of the laws of the Republic of the Philippines; that they are in the process of jointly securing a US $60 Million Guaranteed Term Loan Facility (Loan) from a syndicate of foreign lenders (Lenders); that these Lenders will derive income from their investments through interest payments due on the loan; that among the Lenders are the following entities: (1) Westdeutsche Landesbank Gironzentrale (WLG) a credit institution created by Statutes dated October 1, 1985 which was approved by the Minister of Finance of the State of North Rhine Westphalia of Germany in agreement with the Minister of Transport Economics Affairs; and that WLG's capital stock is, in the aggregate 66.6% owned by the State of North Rhine Westphalia and the Regional Associations of the Rhineland and Westphalia Lippe which are subdivisions of the German Administration whose members are the free states of the present consolidated Germany; (2) Bayerische Landesbank (BL) a public banking institution wholly owned by the Free State of Bavaria i.e., directly, to the extent of 50% and indirectly to the extent of the remaining 50% through the Bavarian Savings Banks; that all the liabilities of BL are guaranteed by the Free State of Bavaria; and that BL is one of the major banks in Germany and acts as the central banking institution to the Bavarian Savings banks; (3) Norddeutsche Landesbank (NL) was created by a law enacted by the State Parliament of the State of Lower Saxony, Germany; that the capital of NL is owned by the State of Lower Saxony to the extent of 60% and the Lower Saxony Savings Bank and Giro Associations to the extent of 40%; and that it was established to conduct business to support the State of Lower Saxony and its municipal authorities in the performance of their public duties. In connection therewith, you are requesting for a ruling to the effect that the interest income to be derived by the Lenders, WLG, BL and NL from the aforesaid loan transaction is exempt from Philippine income tax under Section 28(b)(8)(A) of the Tax Code, as amended considering that the Lenders are financing institutions owned or controlled by foreign governments. In reply thereto, please be informed that income received by foreign governments, financing institutions owned, controlled, or enjoying refinancing by foreign governments and international or regional financing institutions established by governments, from their investments in the Philippines, in loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines is exempt from Philippine income tax pursuant to Section 28(b)(8)(i)(ii) and (iii) of the Tax Code, as amended. Such being the case, and since the Lenders are financing institutions owned or controlled by foreign governments, interest income to be remitted by the Borrowers, Edsa Shangri-la Hotel & Resort Inc., and Mactan Shangri-la Hotel and Resort, Inc. to the Lenders, WLG, BL, and NL are not subject Philippine income tax and consequently, not also subject to the withholding tax provisions of Section 50 (a) in relation to Section 51 both of the Tax Code, as amended. (BIR Ruling No. 102-85 dated June 25, 1985). Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)