BIR Ruling [UN-427-95]

December 4, 1995 BIR RULING [UN-427-95] SGV & Co. SGV Building 6760 Ayala Avenue Makati City Attention: Mr . C . P . Noel Tax Division Gentlemen : This refers to your letter dated April 19, 1995 requesting confirmation of your opinion that the interest to be remitted by your client, Hopewell Power (Philippines) Corporation, arising from loans from Westdeutsche Landesbank Girozentrale (WLG), is exempt from Philippine taxes under the RP-West Germany Tax Treaty and the pertinent provisions of the National Internal Revenue Code. It is represented that Hopewell had obtained a loan from Hongkong branch of WLG bank; that WLG is a banking institution incorporated under the laws of West Germany; and that WLG is majority-owned by the West German government. In reply, please be informed that pursuant to Article 11(3)(b) of the RP-West Germany Tax Treaty, reading: "(b) interest arising in the Republic of the Philippines and paid to the German Government , the Deutsche Bundesbank, the Kreditanstalt fuer Viederaufbau or the Deutsche Gesellschaft fuer Wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) shall be exempt from Philippine tax." and Section 28(b)(8)(A) OF THE Tax Code, viz: "SEC. 28. (a) . . . (b) Exclusions from gross income. . . . (8) Miscellaneous items. (A) Income received 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 by (i) foreign governments. (ii) financing institutions owned, controlled, or enjoying refinancing from them , and (iii) international or regional financing institutions established by governments." (Emphasis added) your opinion is hereby confirmed. It appears from the certification issued on May 24, 1995 by the Embassy of the Federal Republic of Germany in Hongkong that WLG Bank is owned by the German Republic through the State of North Rhine Westphalia, which owns a controlling 43.2% interest in WLG. Furthermore, Section 28(b)(8)(A) of the Tax Code is explicit in its provisions that interest from loans by financing institutions owned or controlled by a foreign government is excluded from the computation of gross income. (BIR Unnumbered Ruling dated August 12, 1977) The fact that the loan was secured through the Hongkong branch of WLG does not affect the tax treatment of interest income therefrom, considering that a branch has no distinct and separate juridical personality from that of its mother company. [Philipp Brothers Oceanic, Inc. (Phil. Branch) (Philbro) vs. CIR, CTA Case No. 3140 dated March 3, 1994] Such being the case, interest payments by your client, Hopewell Power (Phils.) Corporation, to the Hongkong branch of WLG Bank, is exempt from Philippine taxes under the aforequoted provisions of the RP-West Germany Tax Treaty and the National Internal Revenue Code. This ruling is being issued on the basis of your representation. However, if upon investigation the facts are different from those represented, then this ruling shall be considered null and void. cdtech Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)