Interest Income Derived from the Loan Granted by a Foreign Corporation to a Philippine Corporation is Exempt from Income Tax Under the RP-UK Tax Treaty

September 6, 1991 BIR RULING NO. 174-91 28 (b) (8) 216-89 174-91 Gentlemen : This refers to your letter dated August 1, 1991 requesting for confirmation of your opinion that the interest income that was derived by Commonwealth Development Corporation, a statutory corporation of the United Kingdom, from a loan which it extended to United Paragon Mining Corporation, a Philippine corporation, is exempt from taxation pursuant to Section 28 (b) (8) of the Tax Code, as amended, and Article 10 (4) of the RP-U.K. Tax Treaty. It is represented that Commonwealth Development Corporation (CDC) was established in 1948 by an act of the British Parliament in order to provide assistance to overseas countries, particularly to less developed countries, in the form of loans or to equity investments in local entities; that CDC is financed almost entirely by the British Government; that CDC's Board of Directors and officers are appointed by the British Government through the Ministry for Overseas Development; that its activities form part of the Official Aid Programme of the British Government; that CDC recently approved a 24.3 million loan to United Paragon Mining Corporation (UPMC), a listed Philippine company, to finance UPMC's gold operations in Paracale, Camarines Norte; that in consideration thereof, UPMC will pay interest on quarterly basis at a base rate of 12% per annum; and that in a letter of the Secretary of Finance dated October 20, 1977, the CDC is considered an instrumentality owned or controlled by the British Government whose "income derived on loans/investments which may be extended by the corporation in the Philippines constitute income of the foreign government and therefore exempt from income tax as well as the withholding tax requirement under Section 29 (b) (7) (A) and Section 53 of the National Internal Revenue Code, respectively." cdtech In reply, please be informed that pursuant to Section 28 (b) (8) (a) of the Tax Code, as amended, and Article 10, paragraph 4 (a) of the R.P.-U.K. Tax Treaty reading: "Notwithstanding the provisions of paragraph (2) and (3) of this Article (10), interest arising in a Contracting State shall be exempt from tax in the State if it is derived and beneficially owned by: (a) The Government of the other Contracting State, a political subdivision or local authority thereof or an instrumentality of that other State; or xxx xxx xxx The term "instrumentality" as used in this paragraph means any agency or entity created or organized by either Contracting Government in order to carry out governmental functions." the interest income which Commonwealth Development Corporation will derive from the loan it granted to the United Paragon Mining Corporation is exempt from income tax and consequently from the withholding tax imposed under Sections 25 (b) (5) (A) and Section 50 both of the Tax Code, as amended. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge