DA ITAD BIR Ruling No. 081-06

July 25, 2006 DA ITAD BIR RULING NO. 081-06 Philippines-Japan Tax Treaty, Article 10; BIR Ruling No. 156-81 Follosco Morallos & Herce Suite 1506, 15th Floor, 88 Corporate Center 141 Valero Street corner Sedeo Street Salcedo Village, 1227 Makati City Attention: Ms. Rachel P. Follosco Legal Counsel Gentlemen : This refers to your letter dated August 12, 2005, on behalf of your client, Kyoshin (Philippines) Corporation ("KPC"), requesting confirmation of your opinion that Kyoshin Co. Ltd. ("KCL"), is entitled to the ten percent (10%) preferential tax rate on its dividend income from KPC, pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. HCacTI It is represented that KCL is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal office at 7-go, 16-ban, Enokicho, Suita-Shi, Osaka Pref., Japan and with Corporate No. 1209-01-001673 as certified by the Registrar, Kita-Osaka Branch, Osaka Legal Bureau; that it is not registered either as a corporation or as a partnership in the Philippines per certification dated August 2, 2005 issued by the Securities and Exchange Commission; that KPC is a corporation organized and existing under the laws of the Philippines and a wholly owned subsidiary of KCL, with principal address located at 108 Innovation Drive corner Reliance Drive, Carmelray Industrial Park 1, Canlubang, Laguna; that as of June 15, 2005, KCL is a stockholder of KPC and owns One Hundred Six Thousand Five Hundred Ninety Five (106,595) shares of KPC, with a par value of One Hundred Pesos (P100.00) per share, equivalent to a total amount of Ten Million Six Hundred Fifty Nine Thousand Five Hundred Pesos (P 10,659,500.00) representing 100% of the outstanding and issued shares of KPC as evidenced by the Secretary Certificate issued by KPC's Corporate Secretary dated October 17, 2005; that in a Special Meeting of the Board of Directors of KPC, the Board declared cash dividends amounting to Five Million Seven Hundred Twenty Thousand Pesos (P 5,720,000.00) from its unrestricted retained earnings in favor of its stockholders of record as of December 31, 2005 and payable on or before December 31, 2005; that since KPC is a wholly owned subsidiary of KCL, the entire Five Million Seven Hundred Twenty Thousand Pesos (P 5,720,000) will accrue in its favor: and that the dividends accruing in favor of the five (5) directors of KPC who own one (1) share each shall likewise be payable to KCL being the beneficial owner of the five (5) nominal shares recorded in the names of the nominee directors of KPC. In reply, please be informed that Article 10 of the Philippines-Japan tax treaty provides: "Article 10 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 Contracting 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 Contracting 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 which holds directly at least 25 per cent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends ; (Emphasis supplied) cCDAHE b) 25 per cent of the gross amount of the dividends in all other cases. The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx xxx xxx 4. 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 assimilated to income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident. xxx xxx xxx" Based on the abovequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding ten percent (10%) if the latter holds directly at least twenty-five percent (25%) either of the voting shares or of the total shares of the former for a period of six (6) months immediately preceding the date of payment of the dividends. Considering that KCL directly holds 100% of KPC's shares of stock as of June 15, 2005, which is six (6) months immediately preceding the date of payment of the dividends, this Office is of the opinion and hereby holds that the dividend payments of KPC to KCL are subject to the ten percent (10%) preferential tax rate pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. (BIR Ruling No. 156-81 dated July 12, 1981) This ruling is issued based on the facts as represented. However, if upon investigation it shall be disclosed that the 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service