BIR Ruling [DA-224-98]

June 9, 1998 BIR RULING [DA-224-98] SyCip Salazar Hernandez & Gatmaitan SyCipLaw, All Asia Capital Center Paseo de Roxas 1226 City of Makati Attention: Attys . Ernesto S . Taio and Ma . Elizabeth E . Peralta-Loriega Gentlemen : This refers to your letter dated February 4, 1997 requesting for confirmation of your opinion that cash dividends received from AMALGAMATED DEVELOPMENT CORPORATION (ADC), a domestic corporation, by SUMMERVILLE INVESTMENTS LIMITED (SIL) is subject to preferential tax rate of 15% pursuant to Section 25(b)(5)(B) of the Tax Code, as amended (now Section 27(B)(5)(b) of the Tax Code of 1997). LLjur It is represented that SIL is a non-resident foreign corporation incorporated under The International Business Companies Ordinance, 1984 (No. 8 of 1984) of the Territory of British Virgin Islands; that it has an equity investment in ADC; that under the said Ordinance, all dividend payments to non-residents of the British Virgin Islands by a company incorporated under it are exempt from income tax; that Section 111(1) of the said Ordinance provides that "PART XI "INCOME TAXES, STAMP DUTIES AND REGISTRATION OF DOCUMENTS "Exemption from tax, etc. CAP 189 111. (1) Notwithstanding any provisions of the Income Tax Ordinance, "(a) a company incorporated under this Ordinance; "(b) all dividends, interest, rents, royalties, compensations and other amounts paid by the company to persons who are not persons resident in the British Virgin Islands; and "(c) capital gains realized with respect to any shares, debt obligations or other securities of a company incorporated under this Ordinance by persons who are not persons resident in the British Virgin Islands. "are exempt from all provisions of the Income Tax Ordinance." and that, in support of your request you submitted the following documents, viz: 1) a copy of the Memorandum of Association of Summerville Investments Limited; 2) a copy of the relevant parts of The International Business Companies Ordinance, 1984 (No. 8 of 1984); and 3) a copy of the Certification issued by Mr. Noel Barton, Chartered Accountant, British Virgin Islands, attesting to the fact that the Government of the British Virgin Islands does not imposed any tax, levy, withholding tax, or deduction on dividend income received by a company incorporated under the British Virgin Islands International Companies Act from companies incorporated in jurisdiction outside the British Virgin Islands including the Philippines, and to which the Government of the British Virgin Islands does not issued a certification on the matter. In reply, please be informed that then Section 25(b)(5)(B) of the Tax Code of 1977, as amended, provides as follows: "SEC. 25. Rates of Tax on Foreign Corporation . "xxx xxx xxx. "(b) No-resident foreign corporations . . . . "(5) Tax on certain incomes received by non-resident foreign corporations . (A) . . . "(B) On the dividends received from a domestic corporation liable to tax under . . ., the tax shall be 15% of the dividends received, which shall be collected and paid as provided in Section 50(a) of the National Internal Revenue Code, as amended, 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 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this subparagraph;" Generally, under the above-quoted Section 24(b)(5)(B) of the Tax Code, as amended, dividends paid to a non-resident foreign corporation is subject to withholding tax at the rate of 35%. However, if the country where the non-resident foreign corporation is domiciled allows a credit against the tax due from the non-resident corporation taxes deemed to have been paid in the Philippines in an amount equivalent to 20% of such dividends, or does not subject such dividends to taxation , then dividends paid to such non-resident foreign corporation are taxed only at the rate of 15%. Thus, since The International Business Companies Ordinance of the Territory of the British Virgin Islands under which SIL was incorporated does not imposed any tax on dividends received from foreign sources, which logically would include those received from Philippine corporations by foreign corporations domiciled therein, then said cash dividends received by Summervile Investment Limited (SIL) from Amalgamated Development Corporation (ADC) is subject only to the preferential withholding tax rate of 15% imposed under then Section 25(b)(5)(B) of the Tax Code, as amended (now Section 28(B)(5)(b) of the Tax Code of 1997). [BIR Ruling No. 208-89 dated September 28, 1989] This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, the facts are different, then this ruling shall be considered null and void. LLphil Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)