DA ITAD BIR Ruling No. 113-09

December 29, 2009 DA ITAD BIR RULING NO. 113-09 Article 10 (2) (a) Philippines-Netherlands tax treaty; Section 28 (B) (1) of the NIRC; BIR Ruling No. ITAD-99-08 dated 17 November 2008; BIR Ruling No. ITAD-27-07 dated 21 February 2007; BIR Ruling No. ITAD-132-06 dated 27 October 2006; BIR Ruling No. ITAD-82-07 dated 11 July 2007; BIR Ruling No. ITAD-108-07 dated 16 November 2007 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Emmanuel C. Alcantara Tax Division Gentlemen : This refers to your letter dated 15 June 2009, requesting confirmation of your opinion that the dividends to be received by KPIC Netherlands B.V. (KPN) from San Roque Power Corporation (SRPC), are subject to final withholding tax at the rate of 10% in accordance with Article 10 (2) (a) of the Philippines-Netherlands tax treaty. DaTICE It is represented that KPN is a limited liability company organized and existing under the laws of the Netherlands, with office address at Strawinskylaan, 3105, 1077 ZX Amsterdam, The Netherlands; that KPN is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per Declaration of Residence dated 21 April 2009 issued by the Inspector of the Tax Administration Rijnmond/kantoor Rotterdam, the Netherlands; that it is not registered either as a corporation or as a partnership in the Philippines per Certification dated 23 January 2009 issued by the Securities and Exchange Commission; and that SRPC is a corporation duly organized and existing under the laws of the Philippines, with principal office at Barangay San Roque, San Manuel, Pangasinan. It is further represented that on 29 June 2009, the Board of Directors of SRPC declared a cash dividends of Japanese Yen Six Thousand Twenty and 63809/100000 (JPY6,020.63809) per share in favor of all stockholders of record as of 15 June 2009, (or a total of JPY11,344,832,863.36) in favor of all stockholders of record as of 15 June 2009, payable immediately; that as of 29 June 2009, KPN is the registered/legal and beneficial owner of 470,581 Series A Preferred Shares (which are redeemable preferred shares) and 498 common shares of SRPC as well as the beneficial owner of two common shares of SRPC registered in the name of its two nominee directors, each with a par value of Ten Pesos (Php10.00) per share and issue value of Three Thousand Five Hundred Twenty Five (Php3,525) per share, representing 25.0% of the total amount subscribed and paid up shares in SRPC, per Secretary's Certificate dated 28 July 2009 issued by the Corporate Secretary of SRPC; 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 under Section 23 (F) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended by Republic Act No. 9337, 1 a foreign corporation like KPN, whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources in the Philippines. Section 23 (F) provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." Income derived by KPN from sources in the Philippines is generally subject to income tax at the rate of 30 percent based on the gross amount thereof under Section 28 (B) (1) of the Tax Code of 1997, as amended. Section 28 (B) (1) provides: AHDcCT "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, under Section 32 (B) (5) of the Tax Code of 1997, such income derived by KPN in the Philippines may be exempt from income tax if the same is so exempt (or partially exempt ) pursuant to a treaty obligation binding upon the Philippine government. Section 32 (B) (5) 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" With respect to a treaty that may be invoked by KPN, there is the Philippines-Netherlands tax treaty. In accordance with the foregoing, the Philippines-Netherlands tax treaty, particularly its Article 10 provides as follows: TDcCIS "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 percent of the gross amount of the dividends in all other cases. xxx xxx xxx 5. 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 above-cited provisions, the 10 percent preferential tax rate on dividends applies whenever 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. In all other cases, the 15 percent preferential tax rate applies. Such being the case and considering that KPN is a registered/legal and beneficial owner of 470,581 Series A Preferred Shares (which are redeemable preferred shares) and 498 common shares each with a par value of P10.00 per share, and holds 25% of the issued and outstanding capital stock of SRPC, this Office is of the opinion and so holds that the dividend payments by SRPC pertaining to KPN shall be subject to a preferential tax rate of 10 percent, based on the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-99-08 dated 17 November 2008; BIR Ruling No. ITAD-27-07 dated 21 February 2007; BIR Ruling No. ITAD-132-06 dated 27 October 2006; BIR Ruling No. ITAD-82-07 dated 11 July 2007; BIR Ruling No. ITAD-108-07 dated 16 November 2007) HcaDTE 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Entitled an Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 288 of the National Internal Revenue Code of 1997, as Amended, and for Other Purposes), which was signed on May 24, 2005, and effective November 2005.