The Hong Kong Shanghai Banking Corporation Limited (HSBC)

June 9, 2009 BIR RULING [DA-(FIT-09) 286-09] DA294-08 The Hong Kong Shanghai Banking Corporation Limited (HSBC) The Enterprise Center, Tower 1 6766 Ayala Avenue cor. Paseo de Roxas Makati City Attention: Mr. Nelson C. Reyes Senior Vice President Gentlemen : This refers to your letter dated March 23, 2009 requesting confirmation of your opinion that interest income to be earned by the individual investors from the Directional Living Trust Agreements and Long-Term Investment Management Agreements with HSBC (Trust Department) shall be exempt from income tax or withholding tax pursuant to Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997. HIAEaC It is represented that HSBC is a foreign bank organized and existing under the laws of Hong Kong (SAR); that it is doing business in the Philippines through a branch authorized by the Securities and Exchange Commission (SEC) and engaged in banking and trust operations by the Bangko Sentral ng Pilipinas (BSP); that through the Trust Department, HSBC offers Directional Living Trust Agreements (DLTAs) and Long-Term Investment Management Agreements (LTIMAs) with individual investors; that in the DLTA, the individual investor (Trustor) appoints HSBC (Trust Department) as its Trustee to manage, administer, invest and re-invest the Trust which shall be long-term, non-negotiable and non-transferable; that the Trust shall be constituted over the Trustor's initial contribution and such additional contributions as the Trustor shall make during the existence of the Trust; that the investment and re-investment of the funds are to be held by the Trustee for the benefit of the designated beneficiaries; that on the other hand, LTIMA is a non-negotiable and non-transferable agreement between the individual investor and HSBC (Trust Department) wherein the latter binds itself to manage the funds of the investor thus creating a principal-agent relationship between the individual investor, as principal, and HSBC (Trust Department), as agent; and that the following are the general terms and conditions of the proposed DLTAs and LTIMAs, to wit: 1. Eligible investors shall be limited to individuals who are Filipino citizens, resident aliens or non-resident aliens engaged in trade or business within the Philippines only; 2. Minimum investment holding period is at least five (5) years; 3. Investments in the DLTA and LTIMA shall be evidenced by pre-printed agreements in such forms as prescribed by the BSP and clearly indicating the following information: a. Investors are limited to individuals who are Filipino citizens, resident aliens or non-resident aliens engaged in trade or business within the Philippines only and that the investment is non-negotiable and non-transferable; b. Date of investment to determine compliance with the required holding period; c. The DLTA and LTIMA shall indicate that interest income of the fund within the purview of the related provisions on long-term investments under the Tax Code, shall be exempt from the final tax of twenty percent (20%). Provided, that should the Trustor/Principal pre-terminate the DLTA/LTIMA or otherwise, partially redeem the principal portion of the Fund/withdraw amounts in excess of the income portion of the Fund, before the fifth (5th) year, a final tax shall be imposed on the entire income earned during the life of the Trust/Investment Management Account as follows: Holding Period Applicable Tax Rate Four (4) years to less than five (5) years 5% Three (3) years to less than four (4) years 12% Less than three (3) years 20% In reply thereto, please be informed that Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997 provide "(B) Rate of Tax on Certain Passive Income. 1. A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitute and from trust funds and similar arrangements; . . . Provided, further, That interest income from long term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investment evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from tax; Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: EDHCSI Four (4) years to less than five (5) years 5% Three (3) years to less than four (4) years 12% Less than three (3) years 20%" Section 25 (A) (2) reads "(A) Non-Resident Alien Engaged in Trade or Business Within the Philippines. 2. . . . Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investment evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from tax; Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years 5% Three (3) years to less than four (4) years 12% Less than three (3) years 20%" Corollarily, Section 22 (FF), supra, defines the term "long-term deposit or investment certificate" as follows: "(FF) The term 'long term deposit or investment certificate' shall refer to certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by non-bank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations may be prescribed by the BSP." aIAHcE A careful scrutiny of the above-cited sections disclosed that as long as the trust of fund is held by a bank for at least five (5) years and has complied with the requirements mentioned in BIR Ruling No. 030-01 dated July 24, 2001, to wit: 1. Have a maturity of not less than five (5) years; 2. Be in the form of savings, common or individual trust fund, deposit substitutes, investment management accounts or other forms which must be prescribed by the BSP; 3. Be issued by banks only (not by non-bank financial intermediaries and finance companies); 4. Be issued to individual citizen or resident alien or non-resident alien engaged in trade or business within the Philippines only; 5. Be in denomination of Ten thousand pesos (P10,000) or other denominations as may be prescribed by the BSP; and 6. Should not be pre-terminated by the holder before the fifth year. regardless of the term of the investment or maturity of the investment in which it is subsequently invested, the interest income of the trust is exempt from income tax and consequently from withholding tax. The act of placing of funds by the individual investors in HSBC Trust under the DLTA and LTIMA, wherein the funds are locked up with HSBC Trust for a period of not less than 5 years, already fulfills the intention of the law. In other words, the fact that the funds of an individual investor are invested in a trust fund and managed by HSBC (Trust Department) and stay there for not less than five (5) years is already considered a long-term deposit or investment within the contemplation of Sections 24 (B) (1) and 25 (A) (2), ibid. SUCH BEING THE CASE, this Office holds that any interest income derived by the individual investors from DLTA and LTIMA shall be EXEMPT from income tax and consequently from withholding tax pursuant to Sections 24 (B) (1) and 25 (A) (2) 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 disclosed that the facts are different, then this ruling shall be considered null and void. aEAcHI Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service