Proper Withholding Tax Rate Imposed on Interest Payments under the RP-Netherlands Tax Treaty

January 7, 1999 BIR RULING NO. 001-99 32 (B) (5)-000-00-001-99 Atty. Nestor P. Nuez & Associates 9/F, CIFC Towers J. Luna Ave. cor. R. Humabon Ave. North Reclamation Area Cebu City Attention: Atty . Nestor P . Nuez Gentlemen : This refers to your letter dated July 24, 1998 requesting in behalf of your client, Hercules Ultramarine, Inc. (HUI), for a ruling that its interest payment to Hechem B.V. (HBV) is subject only to a 15% final withholding tax pursuant to Article 11(2)(b) of the RP-Netherlands Tax Treaty. It is represented that HUI is a company duly registered with the Board of Investments as a new export producer of refined carrageenan on a preferred non-pioneer status; that at present, HUI is in the final stage of the construction of its plant facilities located in Brgy. Abugon, Sibonga, Cebu; that HBV is a non-resident foreign corporation organized and existing under the laws of the Kingdom of the Netherlands, with principal office at Veraartlaan 8, 2288 HV Rijksvijk, the Netherlands; that to facilitate the importation and acquisition of vital and specialized machineries and equipment, HUI decided to avail of HBV's standing offer of financial assistance in the form of a loan from HBV's internally generated/excess funds; and that in consideration thereto, HUI agreed to pay HBV interest at the prevailing market rate. In reply thereto, please be informed that Article 11(1) and (2) of the RP-Netherlands Tax Treaty provides as follows: "1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. "2. However, such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: (a) 10 per cent of the gross amount if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment; or (ii) on any loan of whatever kind granted by a bank, or any other financial institution; (iii) in respect of public issues of bonds, debentures or similar obligations. llcd (b) 15 per cent of the gross amount of the interest in all other cases ." (emphasis supplied) As can be gleaned from the foregoing, your client's interest payments to HBV do not fall under the three instances described in Article 11(2)(a) which is subject to the withholding tax rate of 10% since the interest to be paid by your client is not in connection with any sale on credit of machineries and equipment or in respect of public issues of bonds, debentures or similar obligations. Furthermore, HBV is not a banking institution. However, its interest payments to HBV is subject only to the withholding tax rate of 15% pursuant to Article 11(2)(b) of the RP-Netherlands Tax Treaty. 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. LLpr Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue