DA ITAD BIR Ruling No. 044-08

June 20, 2008 DA ITAD BIR RULING NO. 044-08 Article 10, Philippines-Germany tax treaty; BIR Ruling No. 559-88 Wacker Machinery Philippines, Inc. 4126 First Cavite Industrial Estate Brgy. Langcaan, Dasmarias, Cavite Philippines Attention: Heinz Gengnagel President & CEO Gentlemen/Ladies : This refers to your letter dated 17 November 2006 and application for relief from double taxation dated 7 November 2006, which were filed on behalf of WACKER CONSTRUCTION EQUIPMENT AG (Wacker Germany), requesting for tax treaty relief on the dividend payments by Wacker Machinery Philippines, Inc. (Wacker Philippines) to Wacker Germany at the preferential tax rate of 10%, pursuant to the Philippines-Germany tax treaty. 1 It is represented that Wacker Germany is a non-resident foreign corporation duly organized and existing under the laws of Germany, with business address at 80791 Munchen, Deutschland; that it is a company that has its headquarters and management at Preuenster 41 in 80809 Munich, Germany, and is registered at the Finanzamt Munchen fur Korperschaften (Inland Revenue Office for Corporations Munich) under the tax number 143/101/90056 with unlimited liability to pay tax, per Certification of Residence dated 30 November 2006 issued by the Inland Revenue Office for Corporations Munich; that Wacker Germany is not registered either as a corporation or as partnership in the Philippines per Certification dated 5 September 2006, issued by the Philippine Securities and Exchange Commission; that Wacker Philippines is a corporation duly organized and existing under the laws of the Philippines, with business address at Lot 9, Block 7, PEZA Drive, First Cavite Industrial Estate, Brgy. Langcaan, Dasmarias, Cavite, Philippines; and that Wacker Philippines is registered with the Philippine Economic Zone Authority under Certificate of Registration No. 99-021. It is further represented that, having acquired said shares from Interwac Holding AG, the stockholdings of Wacker Germany in Wacker Philippines since September 2003 is One Million One Hundred Ninety-Nine Thousand Nine Hundred Ninety-Five (1,199,995) shares with a par value of One Hundred Pesos (PhP100.00) per share or an aggregate amount of One Hundred Nineteen Million Nine Hundred Ninety-Nine Thousand Five Hundred Pesos (PhP119,999,500.00), which represents 99.99% of the outstanding capital stock of Wacker Philippines; that on 24 August 2006, the Board of Directors of Wacker Philippines declared from its retained earnings for the fiscal year, 31 December 2005, cash dividends in the total amount of Ten Thousand Euro (EUR10,000.00) per Board Resolution No. 04, series of 2006; and that the issue/s or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved. ETIcHa In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337, provides as follows, viz. : "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . . dividends . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). TADcCS However, Section 32 (B) (5) of the same Code provides as follows, to wit: "SEC. 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: 2 xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." AcSIDE In this particular case, the treaty involved is the Philippines-Germany tax treaty which, in its Article 10, provides as follows, viz. : "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but the tax so charged shall not exceed: IaSCTE a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of dividends. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident, and income derived by a sleeping partner from his participation as such and distributions on certificates of an investment-trust. xxx xxx xxx" Based on the above-cited provisions, the 10 percent preferential tax rate on dividends applies whenever the beneficial owner of the dividends owns at least 25 percent of the capital of the paying company. In all other cases the 15 percent preferential tax rate applies. Such being the case and considering that Wacker Germany directly holds 99.99% of the total outstanding capital stock of Wacker Philippines, this Office is of the opinion and so holds that the subject dividend payments by Wacker Philippines to Wacker Germany shall be subject to the preferential tax rate of 10 percent, based on the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippines-Germany tax treaty. (BIR Ruling No. 559-88 dated 14 November 1988) This ruling is issued on the basis of the facts as represented. If upon investigation, it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. DHSEcI Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. Formally known as the AGREEMENT BETWEEN THE REPUBLIC OF THE PHILIPPINES AND THE FEDERAL REPUBLIC OF GERMANY FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME AND CAPITAL. 2. TITLE II TAX ON INCOME.