BIR Ruling [DA-276-99]

May 13, 1999 BIR RULING [DA-276-99] Lava Mananghaya & Co . 22/F Antel 1000 Corporate Centre 139 Valero Street, Salcedo Village Makati City 1227 Attention: Atty. Mariano C. Ereso Head, Tax Consulting Gentlemen : This refers to your letter dated March 18, 1999 requesting for a ruling whether or not dividends remitted to Flughafen Frankfurt Main AG (FAG), as well as interest on loans granted by FAG to your clients, Philippine International Air Terminals Co., Inc. (PIATCO) and PAGS Terminal, Inc. (PTI), are exempt from Philippine taxes under the Germany-RP Tax Treaty and the pertinent provisions of the National Internal Revenue Code. It is represented that FAG an entity incorporated under the laws of the Federal Republic of Germany, intends to have equity investments in PIATCO and PTI out of which it expects to receive dividends. It may also grant them loans that will give rise to interest income. In reply, please be informed that pursuant to Article 11(3)(b) of the RP-West Germany Tax Treaty, reading: ITHADC "(b) interest arising in the Republic of the Philippines and paid to the German Government, the Deutsche Bundesbank, the Kreditanstalt fuer Viederaufbau or the Deutsche Gesellschaft fuer Wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) shall be exempt from Philippine tax. and Section 32(B)(7)(a) of the Tax Code, viz: "SEC. 32. (A) . . . (B) Exclusions from gross income. . . . (7) Miscellaneous items. (a) Income Derived by Foreign Government . Income received 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 by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from them, and (iii) international or regional financing institutions established by governments." SaAcHE dividends remitted to FAG, as well as interest on loans granted by FAG to your client PIATCO and PTI, are exempt from Philippine taxes under the Germany-RP Tax Treaty and the pertinent provisions of the National Internal Revenue Code. It appears from the certification issued by the Embassy of the Federal Republic of Germany in Manila that FAG is treated as an instrumentality or agency of the German government since it is wholly-owned by the Federal Republic of Germany, the Federal State of Hessen and the Municipality of Frankfurt. Furthermore, Section 32(B)(7)(a) of the Tax Code of 1997 is explicit in its provisions that income from investments such as dividends and interest from loans by a foreign government is excluded from the computation of gross income. (BIR Unnumbered Ruling UN-427-12-4-95). Such being the case, dividend remittances and interest payments by your clients, PIATCO and PTI to FAG, is exempt from Philippine taxes under the said provisions of the RP-West Germany Tax Treaty and the National Internal Revenue Code. Consequently such payments and remittances are also exempt from the final withholding tax imposed under Section 28(B)(1) and 5(a) of the Tax Code of 1997. This ruling is being issued on the basis of your representation. However, if upon investigation the facts are different from those represented, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)