DA ITAD BIR Ruling No. 099-08

November 17, 2008 DA ITAD BIR RULING NO. 099-08 Section 34 (B) (5), NIRC of 1997; Article 10 (2) (a), Philippines-Netherlands tax treaty Castillo Laman Tan Pantaleon & San Jose Law Firm The Valero Tower, 122 Valero St. Salcedo Village, 1227 Makati City Attention: Maria Victoria D. Sarmiento Abigail D. Sese Gentlemen/Ladies : This refers to your letter dated 21 November 2006 and application for relief from double taxation dated 27 November 2006 which were filed on behalf of your client, ELI LILLY NEDERLAND B.V. (ELN BV), requesting confirmation of your opinion that all dividends to be received by ELN BV from Eli Lilly Philippines, Inc. (ELPI), are subject to final withholding tax at the rate of 10% in accordance with Article 10 (2) (a) of the Philippines-Netherlands tax treaty. 1 It is represented that ELN BV is a nonresident foreign corporation duly organized and existing under the laws of The Netherlands with office address at Grootslag I-5, 3991 R.A., Houten, The Netherlands; that based on a copy of its Amendment To The Articles of Incorporation, ELN BV is private limited liability company and has an authorized capital amounting to Fifteen Million Dutch Guilders divided into Fifteen Thousand stocks of One Thousand Dutch Guilders; that ELN BV is a resident of the Netherlands within of Article 4 of the Philippines-Netherlands tax treaty per Declaration of Residence dated 11 December 2006 issued by the Inspector of the Tax Administration Utrecht-Gooi/kantoor Utrecht Gerbrandystraat, The Netherlands; that it is not registered either as a corporation or as a partnership in the Philippines per Certification dated 7 November 2006 issued by the Securities and Exchange Commission; and that ELPI is a corporation duly organized and existing under the laws of the Philippines, with principal office at 32nd Floor Wynsum Corporate Plaza, 22 Emerald Avenue, Ortigas Center, Pasig City, Philippines. It is further represented that on 20 October 2006, the Board of Directors of ELPI declared cash dividends in the aggregate amount of One Hundred Twenty Million Pesos (PhP120,000,000.00) in favor of all stockholders of record as of 22 October 2006, payable not later than November 30, 2006; that as of 22 October 2006, ELN BV is a stockholder of record of ELPI, having Fifty Three Million Three Hundred Fifty-Three Thousand Forty-Five (53,353,045) subscribed shares with a par value of Ten Pesos (PhP10.00) per share, representing 99.99% of the total amount subscribed and paid up shares in ELPI, per Secretary's Certificate dated 22 November 2006 issued by the Assistant Corporate Secretary of ELPI; that ELN BV is the beneficial owner of the said cash dividend per Secretary's Certificate dated May 2007 issued by the Assistant Corporate Secretary of ELPI; and that the issue/s 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 taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337, provides as follows, viz. : CDcaSA "SEC. 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 same Code provides as follows, to wit: "SEC. 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 ( i.e. , TITLE II-TAX ON INCOME): 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." cDTHIE 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. DECSIT 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 the distribution is a resident. xxx xxx xxx" Based on the aforequoted Article 10 insofar as the Philippines is concerned, the 10 percent preferential tax rate on dividends apply 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 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". aETADI 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 percent preferential tax rate are present. Firstly , ELPI, the payor of the subject, dividends, is a "company" since it is treated as a body corporate for tax purposes. ELN BV, the recipient of the dividends, is also a "company" because its is treated in the same manner. Specifically, ELPI is deemed a domestic corporation, while ELN BV is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly , ELPI 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. ECTIcS Thirdly , ELN BV, 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 , ELN BV is the beneficial owner of the subject dividends, based on the Secretary's Certificate dated May 2007. Fiftly , the capital of ELN BV is wholly divided into shares, based on a copy of the Amendment To The Articles of Incorporation of ELN BV. Lastly, ELN BV directly holds 99.99% of the capital of ELPI, per Secretary's Certificate dated 22 November 2006 issued by the Assistant Corporate Secretary of ELPI, or more than the required stockholdings of 10%. Thus, this Office is of the opinion as it hereby holds that the dividends paid by ELPI to ELN BV 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. ECHSDc 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 having a different tax treatment, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue Footnotes 1. Formally known as the "CONVENTION BETWEEN THE KINGDOM OF THE NETHERLANDS AND THE REPUBLIC OF THE PHILIPPINES FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME".