BIR Ruling [DA-503-05]

December 15, 2005 BIR RULING [DA-503-05] BIR Ruling Nos. 013-96, 215-91 & 285-82; DA-130-02; Sec. 32 (B) (7) (a) Laya Mananghaya & Co . 22/F, Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Attys. Francisco G. Tagao & Roberto L. Tan Gentlemen : This refers to your letter dated October 3, 2005 requesting on behalf of your client, SN Power Holding Singapore Pte., Ltd. ("SN Power Holding"), for confirmation that income derived from its Philippine investments is exempt from Philippine income tax pursuant to Section 32(B)(7)(a) of the 1997 Tax Code, as amended. You have represented that Act No. 71 dated 30 August 1991 of the Kingdom of Norway regulates enterprises which are considered "state-owned" by the Kingdom of Norway and its subsidiaries; that Section 1 of Act No. 71 defines a "state-owned enterprise" as an enterprise which the Kingdom of Norway is the sole owner; that in addition, Act No. 71 provides that if a state-owned enterprise owns so many shares or parts in a company that they represent a majority of the votes, the state-owned enterprise is regarded as a "parent enterprise", and the company wherein the state-owned enterprise owns majority votes is regarded as a "subsidiary"; than further, if one or more subsidiaries, own as many shares or parts in another company that they represent a majority of the votes, that company, too, is regarded as a subsidiary of the parent enterprise; and that Section 2 of Act No. 71 also provides that a parent enterprise and a subsidiary together constitute a "group". You have also represented and provided documentation to establish that SN Power Holding is the holding company established by the SN Power Group as its investment vehicle in the Asia-Pacific region to engage in planning, engineering, construction, operation and ownership of power plants; that SN Power Holding was incorporated under the Companies Act of Singapore and 100% owned by SN Power Holding AS ("SN Power-Norway"); that SN Power-Norway, on the other hand, is a company incorporated under the laws of Norway and 100% owned by Statkraft Norfund Power Invest AS ("SN Power Invest AS"); that SN Power Invest AS is a Norwegian joint venture entity equally owned by Statkraft AS and Norfund; that SN Power Invest AS was initially incorporated by Statkraft SF and Norfund as original stockholders, but the shareholdings of Statkraft SF were subsequently transferred to Statkraft AS; that Statkraft AS is a Norwegian company and 100% subsidiary of Statkraft SF; that Statkraft SF, on the other hand, is 100% owned Norwegian utility and power company, which is a major player in (among others) the European hydro electric power industry; that Norfund, in addition, is a risks capital investments company that is also owned and entirely funded by the Norwegian government; and that finally, you provided the following illustration of the structure of the SN Power Group: HCITAS It has been represented finally that the SN Power Group, through SN Power Holding, entered into a joint venture agreement with a Philippine partner primarily to invest in the Philippines and bid for several hydro power assets to be offered to private entities by the Power Sector Assets and Liabilities Management Corporation. Based on the foregoing representations, you now request for a ruling that since SN Power Holding is a financial institution which is ultimately owned, controlled and financed by the Kingdom of Norway, its income received from its investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on its deposits in banks in the Philippines is exempt from Philippine income tax, and consequently from withholding tax. In support of your request, you have submitted notarized/certified true copies of the following documents: 1. Act No. 71 of 1991 of the Kingdom of Norway; 2. Certification by the Registry of Companies and Businesses of Singapore confirming that SN Power Holding Singapore Pte., Ltd . is incorporated under the Companies Act of Singapore; 3. Business Profile issued by the Accounting and Corporate Regulatory Authority of Singapore, as certified by the Director and by the Company Secretary of SN Power Holding Singapore Pte., Ltd., which, shows among others that SN Power Holding AS is a company incorporated in Norway that owns 100% of the issued shares of SN Power Holding Singapore Pte., Ltd .; 4. Certificate of Registration of SN Power Holding AS issued by the Bronnoysund Register Centre of Norway; 5. Certification by the Chief Financial Officer of SN Power Holding AS that the enterprise is 100% owned by Statkraft Norfund Power Invest AS; 6. Certificate of Registration issued by the Bronnoysund Register Centre of Norway, which among others shows that Statkraft Norfund Power Invest AS is a 100% Norwegian company founded by Statkraft SF and Norfund; 7. Certification by the Chief Financial Officer of Statkraft Norfund Power Invest AS that the enterprise is now equally (50-50) owned by Statkraft AS and Norfund, both of Oslo, Norway; 8. Certificate of Registration issued by the Bronnoysund Register Centre of Norway with an attached Articles of Association for Statkraft AS that shows among others that the company is 100% owned by Statkraft SF; 9. Certificate of Registration issued by the Bronnoysund Register Centre of Norway with an attached English translation of the Articles of Association for Statkraft SF showing among others that the company is a public corporation and 100% owned by the State, monitored through the Ministry of Trade and Industry of Norway; and 10. Certificate of Registration issued by the Bronnoysund Register Centre of Norway for Norfund . CDaSAE In reply, please be informed that Section 32(B)(7)(a) of the Tax Code of 1997 provides that income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financial institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments shall not be included in gross income and shall be exempt from taxation. In applying the relevant section of the Tax Code, this Office in BIR Ruling DA 130-02 dated July 31, 2002, citing BIR Ruling No. 285-82 dated November 16, 1982, ruled 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 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 income tax in accordance with Section 29(c)(8)(A)(1)(2) and (3) of the Tax Code, as amended. In the instant case, since SBI is 55% owned by SNI which, in turn, is wholly owned by the Government of Belgium, SBI could be considered as controlled by said foreign government. A controlled corporation may be defined as a corporation more than fifty per cent (50%) of whose total combined voting power is owned by the shareholder(s) alleged to be in control in the particular case. Accordingly, the interest payments which will be remitted to SBI by PDCP are not subject to Philippine income tax, and consequently, not also subject to the withholding tax provisions of Section 53(b)(2) in relation to Section 54 of the Tax Code." "Later, in BIR Ruling No. 013-96 dated February 14, 1996, this Office reiterated its stance that '. . . since CDCH is a wholly-owned subsidiary of CDC, which is a British Government owned or controlled instrumentality, as earlier confirmed by then Secretary of Finance, Cesar Virata in his letter dated November 9, 1977, this Office is of the opinion that CDCH should also be considered as a financing institution owned, controlled, or enjoying refinancing from the British government as contemplated in Section 28(b)(A)(ii) of the Tax Code, as amended. Accordingly, the income to be received by CDCH from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on its deposits in banks in the Philippines shall not be subject to Philippine income tax and consequently to the withholding tax'." Accordingly, since as represented, SN Holding Singapore Pte., Ltd. is a financial institution ultimately owned, controlled and financed by the Kingdom of Norway as contemplated under Section 32(B)(7)(a)(ii) of the Tax Code of 1997, any income received by SN Holding Singapore Pte., Ltd. from its investment in the Philippines, such as interest on loans, interest on deposits, interest on bonds, dividends, and capital gains on sale of shares of stock, bonds, and other domestic securities, is exempt from Philippine income tax and consequently from withholding tax. ( BIR Ruling No. 013-96 dated February 14, 1996; BIR Ruling DA-130-02 dated July 31, 2002 .) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. CTSDAI Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue