BIR Ruling [UN-186-95]

May 16, 1995 BIR RULING [UN-186-95] Joaquin Cunanan & Co. 8th Floor, BA Lepanto Building 8747 Paseo de Roxas Makati, Metro Manila Attention: Ms . Tomasa H . Lipana Partner Gentlemen : This refers to your letter dated September 20, 1994 requesting for a confirmation of your opinion that the dividends received by The East Asiatic Company Ltd. A/S (EAC-A/S) from its investment in EAC Services, Inc. (EAC) are subject to the reduced tax rate of 15% prescribed under Section 25 (b)(5)(B) of the Tax Code. It is represented that EAC A/S is a corporation organized and domiciled in Copenhagen, Denmark; that it has an existing branch in the Philippines, The East Asiatic Company Ltd. in Manila; that EAC, on the other hand, is a corporation organized and existing under the laws of the Philippines with an authorized capital stock of P2,500,000 consisting of 25,000 shares with a par value of P100 each, of which P1,000,000 equivalent to 10,000 shares thereof have been subscribed and fully paid; that out of the total subscription of 10,000 shares, 2,500 shares equivalent to P250,000 have been subscribed and fully paid by EAC A/S, thereby making EAC A/S the owner of at least 25% of EAC's total voting stock; that the investment in EAC was made directly by EAC A/S (i.e., the funds were directly remitted from Denmark, Copenhagen to EAC) and not coursed through the latter's branch in the Philippines; and that under the present provisions of the Danish Tax Law, dividends received from a foreign subsidiary may be exempt from taxation provided the Danish parent company has at least 25 per cent (25%) holding of the share capital during the entire taxable year in which the dividend is received and that the income of the foreign subsidiary is subject to a tax regime comparable to the Danish tax system. In reply, please be informed that Section 25 (b)(5)(B) of the Tax Code, as amended, provides the following: "SEC. 25. Rates of tax on foreign corporation . (a) . . . (b) Nonresident foreign corporations. xxx xxx xxx "(5) Tax on certain incomes received by non-resident foreign corporations (A) . . . "(B) On dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as provided in Section 50 (a) of the National Internal Revenue Code, as amended, subject to the condition that the country in which the nonresident foreign corporation is domiciled shall allow a credit against the tax due from the nonresident 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 subparagraph;" In the instant case, the country in which the non-resident foreign corporation is domiciled, Denmark, does not impose tax on dividends received from a foreign subsidiary; hence, the first requirement on the taxes deemed to have been paid in the Philippines provided for in Section 25 (b)(5)(B) of the Tax Code, is complied with. Moreover, in the light of the decision of the Supreme Court in the case of Marubeni Corporation vs. Commissioner of Internal Revenue, 177 SCRA 500, EAC A/S is considered a non-resident foreign corporation with respect to its investment in EAC notwithstanding the fact that it has an existing branch in the Philippines. Such being the case, this Office is hereby confirming your opinion to the effect that EAC A/S is subject to the final tax on dividends received from its investment in EAC at the reduced rate of 15%. (BIR Ruling No. 124-83 dated July 8, 1983) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, this ruling shall be considered null and void. cdtech Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)