DA ITAD BIR Ruling No. 058-10

June 8, 2010 DA ITAD BIR RULING NO. 058-10 Articles 10 (2) (a) and 11 (3) (b) Philippines-Germany tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. 559-88; BIR Ruling No. DA-ITAD-052-02; BIR Ruling No. DA-ITAD-109-02; BIR Ruling No. DA-ITAD-171-02; BIR Ruling No. DA-ITAD-044-08; BIR Ruling No. 216-89; BIR Ruling No. DA-ITAD-185-00; BIR Ruling No. ITAD-029-04; BIR Ruling No. DA-ITAD-051-04 Lufthansa Technik Philippines, Inc. Villamor Air Base Pasay City 1309 Philippines Attention: Mr. Edison M. Que SVP and CFO Gentlemen : This refers to your application for tax treaty relief dated April 26, 2006, requesting confirmation of your opinion that: (1) the cash dividends to be paid by Lufthansa Technik Philippines, Inc. (Lufthansa Philippines) to Lufthansa Technik AG (Lufthansa Germany) are subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) of the Philippines-Germany tax treaty, and (2) that the interest payments on bank loans extended by Deutsche Investitions-und Entwicklungs Gessellschaft MBH (DEG Bank) to Lufthansa Philippines are exempt from Philippine tax pursuant to Article 11 (3) (b) of the Philippines-Germany tax treaty. It is represented that Lufthansa Germany, with address at Weg beim Jager 193, 22335 Hamburg, Germany, is a company subject to unlimited tax liability in Germany and registered for tax purposes under the tax number 214/5822/0149 and is a resident of Germany under the Philippines-Germany tax treaty per Certification of Fiscal Residence dated July 25, 2006; that it is not registered either as a corporation or as a partnership in the Philippines per Certification dated May 3, 2006, issued by the Securities and Exchange Commission; that DEG Bank is a non-resident foreign corporation duly organized and existing under the laws of Germany, with principal office address at Belvederestrasse 40, 50933 Cologne, Germany; that it is not registered either as a corporation or as a partnership in the Philippines per Certification dated May 3, 2006, issued by the Securities and Exchange Commission; that Lufthansa Philippines is a corporation duly organized and existing under the laws of the Philippines, with business address c/o MacroAsia Ecozone, Villamor Airbase, Pasay City, 1309 Philippines. It is further represented, that as evidenced by a Certification dated April 20, 2006, issued by the Corporate Secretary of Lufthansa Philippines, Lufthansa Germany has Eight Hundred Sixty-Seven Million (867,000,000) shares in Lufthansa Philippines, with a total par value of Eight Hundred Sixty-Seven Million Pesos (PhP867,000,000.00), representing 51% of the total issued and outstanding capital stock of Lufthansa Philippines; that on March 25, 2006, the Board of Directors of Lufthansa Philippines declared and distributed from its unrestricted retained earnings, cash dividends in the amount of Five Million Dollars (US$5,000,000.00) payable on or before April 28, 2006 to all stockholders of record as of April 10, 2006. HEDSIc In addition, it is represented that Lufthansa Philippines has concluded a loan agreement with DEG Bank on July 19, 2000 to finance its Project, consisting of the purchase of two (2) aircraft hangers, an engine overhaul and test facility and other machinery, equipment and intangibles; that the total amount of the loan is Seventeen Million Five Hundred Thousand Dollars (US$17,500,000.00), covered by three loan agreements as follows: (a) Loan Agreement A Seven Million Five Hundred Thousand Dollars (US$7,500,000.00) was availed on September 15, 2000 and will be repaid until 15 June 2009 (b) Loan Agreement B Seven Million Five Hundred Thousand Dollars (US$7,500,000.00) in two tranches Five Million Dollars (US$5,000,000.00) was taken on September 15, 2000 and the remaining Two Million Five Hundred Thousand Dollars (US$2,500,000.00) was availed on June 15, 2002 will be repaid until June 15, 2007 and (c) Loan Agreement C Two Million Five Hundred Thousand Dollars (US$2,500,000.00) was drawn on June 15, 2002 and will be repaid until June 15, 2009; and that the issues or transactions subject of the above request for ruling 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 of the taxpayer/s involved. 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: "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 . . ., dividends, . . .: 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" 1. On Dividends Article 10 of the Philippines-Germany tax treaty provides: "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: 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. DEaCSA xxx xxx xxx" Accordingly, 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 Lufthansa Germany holds 51% of the total outstanding capital stock of Lufthansa Philippines, this Office is of the opinion and so holds that the dividend payments by Lufthansa Philippines pertaining to Lufthansa 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 November 24, 1988; BIR Ruling No. DA-ITAD-052-02 dated April 16, 2002; BIR Ruling No. DA-ITAD-109-02 dated May 30, 2002; BIR Ruling No. DA-ITAD-171-02 dated October 2, 2002; BIR Ruling No. DA-ITAD-044-08 dated June 20, 2008) 2. On Interests Article 11 of the Philippines-Germany tax treaty in turn provides: "Article 11 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed: a) 10 per cent if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or (iii) in respect of public issues of bonds, debentures or similar obligations. b) 15 per cent of the gross amount of such interest in all other cases. 3. Notwithstanding the provisions of paragraph 2: a) interest arising in the Federal Republic of Germany and paid to the Philippine Government and the Central Bank of the Philippines shall be exempt from German tax; b) interest arising in the Republic of the Philippines and paid to the German Government, the Deutsche Bundesbank, the Kreditanstalt fuer Wiederaufbau or the Deutsche Gesellschaft fuer wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) shall be exempt from Philippine tax. xxx xxx xxx 5. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State from which the income is derived. xxx xxx xxx" Based on Article 11 paragraph 3 (b) of the Philippines-Germany tax treaty, interest arising in the Republic of the Philippines and paid to the German Government, the Deutsche Bundesbank, the Kreditanstalt fuer Wiederaufbau or the Deutsche Gesellschaft fuer wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) shall be exempt from Philippine tax. Such being the case, interest payments made by Lufthansa Philippines to DEG Bank is exempt from Philippine income tax pursuant to Article 11 (3) (b) of the Philippines-Germany tax treaty. (BIR Ruling No. 216-89 dated October 18, 1989; BIR Ruling No. DA-ITAD-185-00 dated December 7, 2000; BIR Ruling No. ITAD-029-04 dated March 29, 2004; BIR Ruling No. DA-ITAD-051-04 dated May 11, 2004) Nonetheless, the Loan Agreements between DEG Bank and Lufthansa Philippines are subject to documentary stamp tax imposed under Section 180 of the Tax Code of 1997, as amended. The same Tax Code also provides that the corresponding documentary stamp taxes shall be levied, collected and paid, for and in respect of the transactions so had or accomplished, by the person making, signing, issuing, accepting, or transferring the document, instrument or paper wherever the same is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines. Thus, the burden of paying the documentary stamp is placed upon the parties to the contract and leaves the tax to be paid indifferently by either party, and accordingly, the party assuming payment of said tax under the contract becomes directly liable therefor. But if for one reason or another, the said tax is not paid, either party to the contract may be made liable for the tax. In view thereof, the documentary stamp tax (including penalties thereto, if there are any) on the Loan Agreement must be paid and the corresponding return thereon be filed by Lufthansa Philippines in accordance with the aforementioned provision of the Tax Code and Revenue Regulations No. 9-2000 (Mode of Payment and/or Remittance of the Documentary Stamp Tax (DST) under Certain Conditions). ADSTCa 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