Tax Exemption of Interest Income Payable by an Instrumentality of the German Government to a Domestic Corporation

September 18, 1992 BIR RULING NO. 269-92 25 216-89 269-92 Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue, Makati Metro Manila Attention: Atty . F . G . Tagao Tax Division Gentlemen : This refers to your letter dated August 10, 1992 requesting a ruling to the effect that interest income payable by your client, Indo-Phil. Textile Mills, Inc. to DEG (Deutsche Investitions und Entwicklungsgesellschaft Mbh) formerly Deutsche Gesellschaft fuer Wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) mbH, a German financial corporation wholly owned and controlled by the Federal Republic of Germany, on a loan granted by DEG to your client is exempt from Philippine income tax and consequently from the withholding tax under the RP-West Germany Tax Treaty and the pertinent provisions of the National Internal Revenue Code. prll It is represented that your client is a domestic corporation duly organized and existing under Philippine laws and engaged in the production of textile products; that it contracted a loan for Ten Million Deutsche Mark (DM 10 M) with DEG, a German company wholly owned and controlled by the Federal Republic of Germany; and that under the loan agreement, DEG will receive interest income in Deutsche Mark to be remitted by your client in semi-annual amortizations. In reply thereto, I have the honor to inform you that under paragraph 3 (b), Article II of the RP-West Germany Tax Treaty, interest arising in the Republic of the Philippines and paid to the German Government, the Deutsche Bundesbank, the Kreditanstalt fuer Weideraufbau or the Deutsche Gesellschaft fuer Wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) mbH, now DEG-Deutsche Finanzierungsgesellschaft fur Beteiligungen in Entwicklungslandern GmbH) shall be exempt from Philippine tax. Moreover, under paragraph 4, Article II of the same treaty, interest arising in a Contracting State shall be exempt from tax in that State if it is derived in respect of a loan made, guaranteed or insured by a government instrumentality of the other Contracting State as by "Hermes Deckung" in the case of the Federal Republic of Germany and by the Central Bank in the case of the Republic of the Philippines, or any other instrumentality as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. Furthermore, even under Section 28 (b) (8) (A) (i), (ii) and (iii) of the Tax Code, as amended, income received by foreign governments, financing institutions owned, controlled or enjoying refinancing by foreign governments and international or regional financing institutions established by governments 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 is exempt from income tax. Such being the case, and since DEG is an instrumentality of the Federal Republic of Germany, interest payments to be made by Indo-Phil. Textile Mills, Inc. to DEG is exempt from Philippine income tax and consequently not also subject to the withholding tax provisions of Section 50 (a) of the Tax Code, as amended. LLpr Very truly yours, JOSE U. ONG Commissioner of Internal Revenue