DA ITAD BIR Ruling No. 076-08

October 29, 2008 DA ITAD BIR RULING NO. 076-08 Article 10; RP-Switzerland Tax Treaty; BIR Ruling No. DA-ITAD-142-02 V.C. Mamalateo & Associates Unit 6C, 20 Lansbergh Place 170 T. Morato Avenue, Quezon City Attention: Carmencita P. Victorino Partner Felix D. Gonzales, Jr. Senior Associate Gentlemen : This is refers to your letter dated 17 December 2007 requesting confirmation, on behalf of your client Poyry-Energy, Inc. (Poyry-Philippines) that the dividend payment by Poyry-Philippines to Poyry-Energy AG (Poyry Switzerland) is subject to a preferential tax rate of 10% pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income (Philippines-Switzerland tax treaty). SITCEA It is represented that Poyry-Switzerland (also officially known, as fully authorized under Swiss law, as Poyry Energy S.A. and Poyry Energy Ltd.) is a joint stock company organized and existing under the laws of Switzerland with registered address at Zurich, as evidenced by its Articles of Association; that Poyry Switzerland is a resident of the Canton of Zurich and is subject to taxation according to the Swiss laws concerning Federal, Cantonal and Municipal tax, with address at Hardturmstrasse 161, 8005 Zurich and with Tax Identification Number J 000'074'734, as evidenced by the Certificate of Residence issued by Finanzdirektion Kanton Zurich dated 07 January 2008; that Poyry-Switzerland is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on 10 December 2007 and 22 April 2008; that Poyry-Philippines is a domestic corporation duly organized and existing under the laws of the Philippines with principal address located at 8th Floor, King's Court I Building, 2129 Pasong Tamo St., Makati City. It is further represented that as of 30 September 2007, out of the Two Hundred Thirty-Six Thousand Eighty (236,080) capital stock of Poyry-Philippines valued at Ten Million Pesos (P10,000,000.00), Poyry Switzerland holds Ninety-Four Thousand Three Hundred Twenty-Five (94,325) Class B shares valued at Nine Million Four Hundred Thirty-Two Thousand Five Hundred Pesos (P9,432,500.00) which represents 39.95% of the subscribed capital stock of Poyry-Philippines as certified by the Corporate Secretary of Poyry-Philippines dated 7 November 2007; that during the special meeting of the Board of Directors held on 18 October 2007, the Board resolved the declaration and payment of cash dividends in the amount of Five Million Five Hundred Thirty-Seven Thousand Five Hundred Thirty-Seven Pesos (P5,537,537.00), which shall be distributed to the stockholders in proportion to their stockholdings and in accordance with Poyry-Philippines' Articles of Incorporation; that Class B shares shall receive dividends at the rate of P58.52 per share; that Class B total dividend shall be P5,520,527.00 which is the remaining amount after the payment of dividends of Class A shares; that the said cash dividends shall be payable on 15 December 2007 to the stockholders of record as of 30 September 2007; and that the issues 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. 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 nonresident corporation from the Philippines. 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: TCacIE "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. AaSHED xxx xxx xxx" In accordance with the foregoing, Article 11 of the Philippines-Switzerland tax treaty may apply to the instant case. It 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 also be taxed in the Contracting 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 beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 3. The term "dividends" as used in this Article means income from shares or other rights not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of that State of which the company making the distribution is a resident. SEHaDI xxx xxx xxx" Based on the foregoing, dividends paid by the Philippine corporation to a company which is a resident of Switzerland may be taxed at a rate not exceeding ten percent (10%) of the gross amount of dividends if the recipient is a company which holds directly at least 10% of the capital of the Philippine corporation; or fifteen per cent (15%) in all other cases. This being the case and since Poyry-Switzerland is a resident of Switzerland and holds directly 39.95% of the capital stock of Poyry-Philippines, this Office is of the opinion and so holds that dividends paid by Poyry-Philippines to Poyry-Switzerland are subject to the preferential tax treaty rate of 10% of the gross amount of dividends. (BIR Ruling No. 146-02 dated August 22, 2002) 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