DA ITAD BIR Ruling No. 067-10

June 21, 2010 DA ITAD BIR RULING NO. 067-10 Article 10 (2) (a), Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 099-08; BIR Ruling No. DA-ITAD-008-09; BIR Ruling No. DA-ITAD-040-09; BIR Ruling No. DA-ITAD-085-09 Hoya Glass Disk Philippines, Inc. 111 East Main Avenue, SEPZ Laguna Technopark Bian, Laguna 4024 Attention: Ms. Ma. Anita A. Policarpio Finance & Accounting Manager Gentlemen : This refers to your letter dated June 23, 2009, requesting confirmation of the tax treaty treatment on cash dividends to be given to your major stockholder, Hoya Holdings (Asia) B.V. Netherlands (Hoya-Netherlands) which holds 99.99% of Hoya Glass Disk Phils., Inc.'s (Hoya-Philippines) shares of stock, shall be subject to a preferential tax rate pursuant to the Philippines-Netherlands tax treaty. DcCEHI It is represented that Hoya-Netherlands is a nonresident foreign corporation organized and existing under the laws of The Netherlands with office address at Uithoorn, The Netherlands; that it is not registered either as a corporation or a partnership in the Philippines per Certification dated June 5, 2009 issued by the Securities and Exchange Commission; that Hoya-Philippines (formerly NSG Philippines, Inc.) is a corporation registered with the Philippine Economic Zone Authority under Certificate of Registration No. 97-010, duly organized and existing under laws of the Philippines, with principal office and place of business at 111 East Main Avenue, Special Economic Philippine Zone, Laguna Technopark, Bian, Laguna 4024, Philippines. It is further represented that Hoya-Netherlands holds 548,795 shares with a par value of P1,000.00 per share with 99.999% ownership in Hoya-Philippines; that on May 6, 2009, the Board of Directors of Hoya-Philippines approved and declared cash dividends in the amount of US$39,635,248.00 in favor of Hoya-Netherlands of record as of May 6, 2009, payable on or before June 30, 2009; and that the issue or transaction subject of this 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 judicial appeal per Sworn Statement issued by Hoya-Philippines dated June 18, 2009. 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 to dividends received by a nonresident foreign corporation which 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%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: SCDaET "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." Thus, the provisions of Article 10 of the Philippines-Netherlands tax treaty, which you invoke, may apply to the instant case. It provides "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 4. 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 that distribution is a resident." THIECD Based on the aforequoted Article 10 insofar as the Philippines is concerned, the 10% 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." Based on the representations made and the documents presented, it appears that all of the conditions in applying the 10% preferential tax rate are present. Firstly, Hoya-Philippines, the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. Hoya-Netherlands, the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, Hoya-Philippines is deemed a domestic corporation, while Hoya-Netherlands is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. cEHSTC Secondly, Hoya-Philippines 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, Hoya-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, Hoya-Netherlands is the beneficial owner of the subject dividends, based on the Secretary's Certificate dated June 16, 2009. Fifthly, the capital of Hoya-Netherlands is wholly divided into shares, based on the Articles of Incorporation of Hoya-Netherlands. Lastly, Hoya-Netherlands directly holds 99.999% of the total amount subscribed and paid up shares of Hoya-Philippines, per Secretary's Certificate dated June 16, 2009 issued by the Corporate Secretary of Hoya-Philippines, or more than the required stockholdings of 10%. Based on the above-cited provisions, the ten percent (10%) preferential tax rate on dividends applies whenever the beneficial owner of the dividends holds directly at least 10% of the capital of the paying company. In all other cases, the fifteen percent (15%) preferential tax rate applies. Such being the case and considering that Hoya-Netherlands holds 99.999% of the capital of Hoya-Philippines, this Office is of the opinion and so holds that the dividend payments by Hoya-Philippines to Hoya-Netherlands shall be subject to the preferential tax rate of 10%, based on 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; 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