BIR Ruling [DA-392-98]

August 26, 1998 BIR RULING [DA-392-98] SyCip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . Fides A . Balili Gentlemen : This refers to your letter dated May 25, 1998, requesting on behalf of your client, Hollandsche Aanneming Maatschappij B . V . Philippines ( "HAM BV" ), for a ruling that the rental income to be derived by a Dutch company, Nederlandsche Overzee Baggermaatschappij B . V . ( "NOB BV" ), is not subject to income tax pursuant to Articles 5 and 7 of the RP-Netherlands Tax Treaty. cdt It is represented that HAM BV and Jan de Nul N.V. formed a joint venture with principal office address at Excelsior Building, 161 Roxas Blvd., Paraaque, Metro-Manila, to perform sub-contracted work in connection with the Construction of the Cebu South Reclamation Project (OECF Loan No. PH-PI57) for the Cebu City Government; that to fulfill the contract, the joint venture intends to lease a dredging vessel (without a crew) from NOB BV, under a bareboat charter agreement; that NOB BV is a corporation duly existing and organized under the laws of the Netherlands and is engaged in the business of leasing dredging vessels and other dredging equipment; and that NOB BV is not engaged in trade or business in the Philippines and does not maintain any branch office or any other place of business in the Philippines. In reply, please be informed that Article 7 of the RP-Netherlands Tax Treaty provides as follows: "ARTICLE 7 Business Profits (1) The profits of an enterprise of one of the States shall be taxable only in that State, unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. . . ." Moreover, Article 5(1) and (2) of the RP-Netherlands Tax Treaty, provides, viz: "ARTICLE 5 Permanent Establishment (1) For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on. (2) The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, quarry or other place of exploration or extraction of natural resources; (g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; (h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel which activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve month period. . . ." Considering that NOB BV will lease a dredging vessel under a bareboat charter agreement (without a crew), and that it does not have a permanent establishment in the Philippines to which its business profits/income are attributable, rental payments received by it from the HAM BV and Jan de Nul N.V. joint venture are not subject to Philippine income tax and consequently to the withholding tax prescribed under Section 28(B)(3) in relation to Section 57(A) of the Tax Code of 1997. (BIR Ruling No. 022-89 dated February 15, 1989; BIR Ruling No. 174-92). However, gross receipts derived by Nederlandsche Overzee Baggermaatschappij B.V. from the lease of the dredging vessel shall be subject to the 10% VAT to be withheld and remitted by the HAM BV and Jan de Nul N.V. joint venture pursuant to Section 108 (A) in relation to Section 114 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)