Whether the Interest Paid on a Loan Secured by Hopewell Power (Philippines) Corporation from the Hongkong Branch of Z-Landerbank Bank Austria AG (LBA) is Exempt from Philippine tax on Interest Income under the Pertinent Provisions of the RP-Austria Tax Treaty and the National Internal Revenue Code

October 23, 1995 BIR RULING NO. 164-95 28 (b) (8) (A) 000-00 164-95 SGV & Co. SGV Building 6760 Ayala Avenue Makati City Attention: Mr . C . P . Noel Tax Division Gentlemen : This refers to your letter dated May 24, 1995 requesting confirmation of your opinion that interest paid on a loan secured by your client, Hopewell Power (Philippines) Corporation, from the Hongkong branch of Z-Landerbank Bank Austria AG (LBA), is exempt from Philippine tax on interest income under the pertinent provisions of the RP-Austria Tax Treaty and the National Internal Revenue Code. It is represented that Hopewell has obtained a loan from the Hongkong branch of LBA, a banking institution incorporated under the law of Austria; that Hopewell pays interest on such loan and remits the same to LBA; that the controlling interest in LBA is held by the Republic of Austria and by Anteilsversaltung Zentralsprkasse (AVZ), an entity fully controlled by the City of Vienna and which guarantees all the obligations of AVZ; that in your opinion, such interest is exempt from Philippine tax pursuant to Article 11(4) of the RP-Austria Tax Treaty which reads: "(4) Notwithstanding the provisions of paragraphs 2 and 3, interest arising in a Contracting State and derived by the government of the other Contracting State including political subdivisions and local authorities thereof , the Central Bank of that other Contracting State and any financial institution wholly-owned or controlled by the government, or by any resident of that other Contracting State with respect to debt-claims guaranteed or indirectly financed by the government of that other Contracting State, including political subdivisions and local authorities thereof , the Central Bank of that of that other Contracting State and any financial institution wholly-owned or controlled by that government shall be exempt from tax in the first-mentioned Contracting State. "(Emphasis added) You also cited Section 28(b)(8)(A) of the Tax Code, as amended, as a justification for the tax exemption of interest payable to LBA, thus: "SEC. 28. Gross Income . (b) Exclusions from gross income. (8) Miscellaneous items. (A) Income received 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 by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from them , and (iii) international or regional financing institutions established by governments." (Emphasis supplied) In reply, please be informed that your opinion is hereby confirmed. It appears from the certification issued by the Hongkong branch of LBA duly authenticated by the Philippine Consulate that LBA is 19.6% owned by the Republic of Austria and 45% owned by AVZ, which in turn is fully controlled by the City of Vienna which fully guarantees all obligations of AVZ. a As such, the transaction falls within the coverage of the aforequoted section of the Tax Code which excludes from gross income such income received by foreign governments or financing institutions owned/controlled by them from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in Philippine banks. The fact that the loan was secured through the Hongkong branch of LBA does not affect the tax treatment of interest earned therefrom, considering that a branch has no distinct or separate juridical personality from that of its mother company. This ruling is being issued on the basis of your representation. However, if upon investigation the facts are different from those represented, then this ruling will be considered null and void. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue