Taxability of Dividends Payable by Interbank to American Express Bank Ltd.

September 17, 1986 BIR RULING NO. 180-86 25 000-00 180-86 Gentlemen : This refers to your letter dated July 17, 1986 stating that your client, American Express Bank Ltd. (AEB) is a corporation duly organized and existing under the laws of Connecticut, U.S.A.; that it has a duly licensed offshore banking unit (OBU) operating in the Philippines; that on July 4, 1986, AEB entered into a Stock Subscription and Purchase Agreement (Purchase Agreement) with (1) the International Corporate Bank (Interbank), a corporation duly organized and existing under Philippine law engaged in the business of commercial banking; and (2) the National Development Company (NDC) also a Corporation duly organized and existing under Philippine law, and wholly-owned by the Republic of the Philippines; that NDC presently owns 99.75% of the issued and outstanding capital stock of Interbank; that pursuant to Art. 2.1 of the Purchase Agreement AEB hereby subscribes to and agrees to purchase and Interbank agrees to issue and sell 214,778 shares of the common voting stock of Interbank having a par value of 100 pesos per share for P30,416,875 and AEB agrees to acquire and purchase from NDC and NDC agrees to transfer, sell, assign and deliver to AEB, free and clear of all liens, charges, encumbrances and security interest of whatever nature, 2,101,245 shares of the common voting stock of Interbank, having a par value of 100 pesos per share for P297,583,125, such shares to be issued by Interbank and sold by NDC collectively the "Stock" Constituting 40% of the total issued and voting capital stock of Interbank; that AEB shall have no obligation to purchase the stock except with and contingent upon AEB receiving, the peso proceeds of the retirement of AEB loans to the Central Bank of the Philippines governed by the Restructuring Agreement; that should the purchase eventually be consummated upon fulfillment of the terms and conditions of the Purchase Agreement, AEB will become owner of 10% of the total issued and voting capital stock of Interbank; and that Art. 11.3 of the Purchase Agreement allows AEB to "assign its rights and obligations hereunder to any subsidiary or nominee communicated by AEB to NDC prior to closing Date" such that should AEB exercise such right, it is possible that an entity other than AEB shall become owner of 40% of the total issued and voting capital stock of Interbank. You now request confirmation of your opinion on the following: "1. Should AEB itself consummate the purchase, thereby becoming the owner of 40% of the total issued and voting capital stock of Interbank, the dividends payable by Interbank to AEB as such stockholder will be subject to the 10% final withholding tax on intercorporate dividends prescribed under Section 24(c)(i) of the Tax Code, and will not be subject further, upon remittance to AEB abroad, to the 15% branch profit remittance tax imposed under Section 24(b)(2)(ii) of the Tax Code; "2. Should AEB assign its rights under the Purchase Agreement to another entity which is a foreign corporation not engaged in trade or business in the Philippines, and such entity consummate the purchase, the dividends payable by Interbank to this entity as stockholder of Interbank (a) will be subject to 15%, as prescribed by Section 24(b)(1)(iii) of the Tax Code, provided that the condition imposed in said section (i.e., tax-sparing) is complied with, if the entity is not otherwise a resident of a treaty country; (b) will be taxed at the rate(s) imposed under the relevant Tax Treaty if the entity is a resident of a treaty country; "3. Should AEB assigns its rights to another entity, which is either a foreign corporation engaged in trade or business in the Philippines or a domestic corporation, and such entity consummates the purchase as to become a stockholder of Interbank, the dividends payable to this entity by Interbank shall be subject to a final withholding tax of 10% as prescribed under Section 24(c)(1) of the Tax Code." In reply thereto, I have the honor to inform you as follows: (1) For Philippine income tax purposes, AEB is considered a resident foreign corporation because it has a duly licensed offshore banking unit in the country. Hence, should AEB itself consummate the purchase, the dividends payable by Interbank to AEB, a resident foreign corporation is not subject to tax under Title II of the Tax Code. [Sec. 25(a)(6(D), Tax Code, as amended by Executive Order No. 37]. Moreover, said dividends are not subject to the 15% branch profit remittance tax upon remittance thereof to AEB abroad, Under Section 25(a)(5) of the Tax Code, amended by Executive Order No. 37, the 15% branch profit remittance tax is imposed on profits remitted abroad by a branch to its head office; and the dividends alluded to in this case shall not be considered branch profits unless the same are effectively connected with the conduct to its (head office) trade or business in the Philippines, i.e., banking transactions. In this case, however, the dividends were to be remitted to AEB (home office) not by AEB's OBU in the Philippines but by Interbank. In other words, the dividends do not represent profits earned by AEB's OBU which are effectively connected with the conduct of AEB home office' banking transactions in the Philippines. (BIR Ruling No. 049-86 dated April 23, 1986. (2) Should AEB assign its rights under the Purchase Agreement to another foreign corporation not engaged in trade or business in the Philippines, the dividends payable by Interbank to such recipient corporation shall be subject to 15% withholding tax provided that the country of the recipient corporation is not a treaty country and that the conditions imposed in Section 25(b)(5)(B) of the Tax Code, as amended by Executive Order No. 37, are complied with, i.e. "the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this Section." However, if the recipient foreign corporation is a resident of a treaty country, said dividends will be taxed at the rate prescribed under said tax treaty. cdtech (3) Finally, should AEB assign its rights under the Purchase Agreement to either a resident foreign corporation or a domestic corporation, the dividends payable by Interbank to said entity shall not be subject to tax. (Sec. 25(a)(6)(D) and Sec. 24(e)(4), Tax Code, as amended by Executive Order No. 37.) Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner