15% Withholding Tax on Reinsurance Premiums

July 12, 1989 BIR RULING NO. 148-89 24-b 261-81 148-89 Gentlemen : This refers to your letter dated May 8, 1989 requesting confirmation of your opinion to the effect that interest on reinsurance premiums being held and paid by local ceding companies to your client, Munich Reinsurance Company abroad is subject to the 15% Philippine withholding tax pursuant to paragraph 2(b), Article II of the RP-West Germany Tax Treaty. cdtech It is represented that your client is a non-resident foreign reinsurance company organized and existing under the laws of West Germany; that it has entered into reinsurance contracts with various local insurance companies in the Philippines; that pursuant to the Insurance Code, the local insurance companies retain 40% of the reinsurance premiums due to your client and which are released after one year; that in the meantime that the 40% of the reinsurance premiums is held by the local or ceding insurance companies, it earns interest, the rate of which is agreed upon by the parties; and that the 40% including the interest is allowed remittance by the Insurance Commissioner and the Central Bank net of the withholding tax on the interest portion. In reply thereto, I have the honor to inform you that paragraph 5, Article II of the RP-West Germany Tax Treaty defines the term "interest" as income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State from which the income is derived. Moreover, paragraphs 1 and 2, Article II of the aforesaid treaty provide as follows: "Article II " INTEREST "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed; (a) 10 per cent 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 (iii) in respect of public issues of bonds, debentures or similar obligations. (b) 15 per cent of the gross amount of such interest in all other cases." Under the aforequoted paragraph 2(b), the interest on the reinsurance premiums to be remitted by local or ceding insurance companies to Munich Reinsurance Company is subject to a 15% withholding tax. aisadc Very truly yours, (SGD.) JOSE U. ONG Commissioner