Royalties Paid by Philippine Moulded Pulp Products to Brodrene Hartmann Subject to 1/3 of the Regular Rate of 35%

July 3, 1985 BIR RULING NO. 105-85 37-a 000-00 105-85 Gentlemen : This refers to your letter dated May 17, 1985 requesting for confirmation that the Philippine withholding tax on royalties paid by your client, Philippine Moulded Pulp Products, Inc. (Philmop) to Brodrene Hartmann A/S (Hartmann) is 1/3 of the regular rate of 35% as provided under Article III par. 3 of the RP-Denmark tax treaty. It is represented that Philmop is a domestic corporation engaged in the business of manufacturing moulded pulp egg trays and egg cartons purely out of recycled waste paper and cartons which are transformed into pulp; that it entered into a technical assistance and know-how agreement with Hartmann, a corporation of Denmark whereby Philmop was given all and exclusive right to utilize Hartmann machinery and dies for the production of egg packaging material and other moulded pulp products manufactured on the Hartmann machines; that 95% of Philmop's gross income are derived entirely from the above business operation; and that in consideration thereof, Philmop has agreed to pay Hartmann a royalty fee amounting to 1% (formerly 3%) of the net sale of all moulded pulp articles manufactured therefrom and sold by Philmop. In reply, please be informed that Article VIII (3) and Article VI (2) (h) of the RP-Denmark tax treaty provide as follows: "Art. VIII, (3) the Philippine withholding tax on royalty paid to a resident or corporation in Denmark by a resident or corporation in the Philippines may be reduced by 1/3 of the regular tax due thereon if: (a) the payor is engaged in the active conduct of business in areas of investment enumerated in paragraph 2 of Article VI preferably in joint venture; and (b) eighty percent (80%) of the gross income of the payor during the taxable year was derived from the active conduct of business in preferred areas of investment where the subject of royalty payment was utilized. Article VI (2), (h) Preferred areas of Investment: xxx xxx xxx (h) The manufacture of pulp from woods, rags, rice straw, bagasse, abaca waste, bamboo and other indigenous materials ." Under the above-quoted provisions of the Tax Treaty, the royalties paid by Philippine Moulded Pulp Products, Inc. to Brodrene Hartmann A/S pursuant to their agreement is subject to 1/3 of the regular rate of 35%. cdta Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner