DA ITAD BIR Ruling No. 045-10

April 20, 2010 DA ITAD BIR RULING NO. 045-10 Article 10, Philippines-Netherlands Tax Treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. DA-ITAD 008-09; BIR Ruling No. DA-ITAD 040-09; BIR Ruling No. DA-ITAD 085-09 Servier Philippines, Inc. #2 Orion corner Mercedes Streets Bel-Air Village, Makati City Attention: Mr. Virgilio V. Morales, Jr. Controller Ms. Collette Rouches Managing Director Gentlemen : This refers to your letter dated September 8, 2009, requesting for confirmation of your opinion that the dividend payments received by SERVIER INTERNATIONAL B.V. ( Servier-Netherlands ) from SERVIER PHILIPPINES, INC. ( Servier-Phils. ) are subject to ten percent (10%) preferential tax rate pursuant to Article 10 of the Philippines-Netherlands tax treaty. It is represented that Servier-Netherlands is a resident of the Netherlands within the meaning of Article 4 of the Convention for the Avoidance of Double Taxation between the Netherlands and the Republic of the Philippines as declared by the Inspector of the Tax Administration Holland-Midden/kantoor Leiden, the Netherlands dated August 27, 2009; that its principal office is located at Tijberg 9, 2716 LH Zoetermeer, The Netherlands; that Servier-Netherlands is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company dated September 4, 2009 issued by the Securities and Exchange Commission of the Philippines; that Servier-Phils. is a domestic corporation with principal address at No. 02 Orion Cor. Mercedes St., Bel-Air Village, Makati City. It is further represented that on August 27, 2009, Servier-Phils. declared a 140% cash dividend equivalent to ONE HUNDRED FORTY MILLION PESOS (Php140,000,000.00) payable to stockholders of record as of August 27, 2009; that Servier-Netherlands is a legal and beneficial owner of 999,995 shares or a total of Ninety-Nine Million Nine Hundred Ninety-Nine Thousand Five Hundred Pesos (Php99,999,500.00) which is equivalent to 99.9995% of the total outstanding shares of Servier-Phils. as evidenced by the duly notarized Secretary's Certificate issued by Servier-Phils. ' Corporate Secretary dated September 2, 2009; and that the issues or transactions subject of the above application are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general. It provides: cSATEH "Section 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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 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: 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. xxx xxx xxx" In this particular case, the treaty involved is the Philippines-Netherlands 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 one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. AECIaD xxx xxx xxx" Based on the aforequoted Article 10 in so far as the Philippines is concerned, the 10 percent preferential tax rate on dividends applies when the following conditions concur: (1) the payor and recipient of the dividends must be separately treated as a "company" , (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of The Netherlands, (4) the recipient of the dividends is the beneficial owner thereof, (5) the capital of such recipient is wholly or partly divided into shares, and (6) the recipient holds directly at least 10 percent of the capital of the payor of the dividends. On the other hand, in applying the 15 percent preferential tax rate, less stringent conditions need concurrence, to wit: (1) the payor of the dividends must be a "company" , (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of The Netherlands, and (4) the recipient of the dividends is the beneficial owner thereof. Article 3 (e) of the Philippines-Netherlands tax treaty defines the term "company" as "any body corporate or any other entity which is treated as a body corporate for tax purposes" . For purposes of determining the residency of the payor and/or recipient of the dividends, Article 4 (1) of the same tax treaty provides: "Article 4 FISCAL DOMICILE 1. For the purposes of this Convention, the term 'resident of one of the States' means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature." xxx xxx xxx" Based on the representations made and the documents presented, it appears that all of the conditions in applying the 10 percent preferential tax rate are present. Firstly, Servier-Phils., the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. Servier-Netherlands, the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, Servier-Phils. is deemed a domestic corporation, while Servier-Netherlands is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly, Servier-Phils. is a resident of the Philippines since it is treated as a juridical person under the laws of the Philippines, and is liable to taxation therein by reason of its being a domestic corporation. Thirdly, Servier-Netherlands, the recipient of the subject dividends, is a resident of The Netherlands for purposes of the Philippines-Netherlands tax treaty as declared by the tax authority of The Netherlands. Fourthly, Servier-Netherlands is the beneficial owner of the subject dividends, based on the Secretary's Certificate dated September 2, 2009. Fifthly, the capital of Servier-Netherlands is wholly divided into shares, based on a copy of the Articles of Incorporation of the Servier-Netherlands. Lastly, Servier-Netherlands directly holds 99.9995% of the capital of Servier-Phils., per Secretary's Certificate dated September 2, 2009 issued by the Corporate Secretary of Servier-Phils., or more than the required stockholdings of 10%. Thus, this Office is of the opinion as it hereby holds that the dividends paid by Servier-Phils. to Servier-Netherlands shall be subject to the preferential tax rate of 10 percent of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD 99-08 dated November 17, 2008; BIR Ruling No. DA-ITAD 008-09 dated January 27, 2009; BIR Ruling No. DA-ITAD 040-09 dated March 25, 2009; and BIR Ruling No. DA-ITAD 085-09 dated September 10, 2009) This ruling is issued on the basis of the facts as represented. However, 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group