Foreign Corporation Not Engaged in Trade or Business in the Philippines is Not Subject to Any Internal Revenue Tax on Business

July 10, 1987 BIR RULING NO. 198-87 25 (b) 129-87 198-87 Gentlemen : This refers to your letter dated February 5, 1987 requesting confirmation of your opinion to the effect that payments received by your client, KRAFTWERK UNION AKTIENGESELLSCHAFT (KWU) under a subcontract agreement with Marubeni Corporation (MC) are not subject to withholding tax in accordance with the RP-West Germany Tax Treaty. It is represented that MC is a Japanese corporation licensed to engage in trade or business in the Philippines, that MC entered into a contract with National Power Corporation (NPC) covering the engineering, supply and rehabilitation works on the Malaya Thermal Power Plants; that MC subcontracted KWU to undertake the rehabilitation works (installation and construction) for the plant; that KWU is a non-resident West German corporation not engaged in trade or business in the Philippines that KWU in turn, subcontracted Maschinen & Technik Inc. (Matec), a corporation organized under the laws of the Philippines, to perform the said rehabilitation works; that KWU will not render any service in the Philippines; that MC will pay the subcontract fee to KWU; and that KWU will pay Matec. In reply thereto, I have the honor to inform you that under the foregoing facts, KWU is not engaged in trade or business in the Philippines; hence, it is not subject to any internal revenue tax on business . Moreover, "the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." (Art. 7(1), RP-West Germany Tax Treaty) From the foregoing facts, and since Matec is the party who will actually perform the said rehabilitation work, KWU is not considered to have carried on business in the Philippines through a permanent establishment in the Philippines as contemplated in Article 5 of the RP West Germany Tax Treaty. Consequently, the profit derived by KWU in the above rehabilitation work is not subject to Philippine income tax. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner