ITAD BIR Ruling No. 003-15

January 9, 2015 ITAD BIR RULING NO. 003-15 Article 10 (Dividend), Philippines-Netherlands tax treaty Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Malou P. Lim Partner Gentlemen : This refers to your tax treaty relief application filed on June 27, 2014, on behalf of your client, LAIII MEDICAL CITY COOPERATIEF U.A. ("LAIII MEDICAL"), requesting confirmation that dividend paid by PROFESSIONAL SERVICES, INC. ("PROFESSIONAL SERVICES") to LAIII MEDICAL is subject to income tax at a preferential rate of 10 percent pursuant to 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 ("Philippines-Netherlands tax treaty") . It is represented that LAIII MEDICAL is a foreign corporation organized and existing under the laws of The Netherlands and is a resident of the Netherlands, based on its Articles of Association, and on the Declaration of Residence issued by the Tax Administration Office Rotterdam, The Netherlands on June 13, 2014; that LAIII MEDICAL is situated at De Entre 99-197, 1101 He, The Netherlands; that LAIII MEDICAL is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on July 10, 2014; and that, on the other hand, PROFESSIONAL SERVICES is a domestic corporation situated at Don Eugenio Lopez Sr. Medical Complex, Ortigas Avenue, Pasig City, Philippines. It is further represented that on April 30, 2014, the Board of Directors of PROFESSIONAL SERVICES, at its meeting, declared cash dividends in the total amount of Php100.00 per share to all stockholders of record as of December 31, 2013; and that LAIII MEDICAL holds a total of 354,400 common shares of stock with a par value of P100.00 per share or a total par value of PhP35,440,000.00 which represents almost 17.90 percent of the total shares of PROFESSIONAL SERVICES; and that said shares are acquired by LAIII MEDICAL on April 22, 2008, July 6, 2010, May 25, 2011, May 24, 2012 and on January 30, 2014 as evidenced by the Secretary's Certificate issued by the Corporate Secretary of PROFESSIONAL SERVICES on June 26, 2014. It is finally represented that the dividend subject of this 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, based on the Sworn Statement issued by the Vice President for Finance Administrative and Management Support Services of PROFESSIONAL SERVICES on June 24, 2014. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividend payable to LAIII MEDICAL, a foreign corporation not engaged in trade or business in the Philippines, is subject to income tax at the rate of 30 percent, thus: DISTcH "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 provides that such dividend may be exempt from income tax or subject to reduced rate to the extent required by any treaty obligation on the Philippines, viz. : "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, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "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" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. In subparagraph (a) of paragraph 2, the term "capital" is used in relation to the taxation treatment of dividends, i.e. , distributions of profits to shareholders. The use of this term in this context implies that, for the purposes of subparagraph (a), it should be used in the sense in which it is used for the purposes of distribution to the shareholder (in particular case, the parent company). SDcITH a) As a general rule, therefore, the term "capital" in subparagraph (a) should be understood as it is understood in company law. Other elements, in particular the reserves, are not to be taken into account. b) Capital, as understood in company law, should be indicated in terms of par value of all shares which in the majority of cases will be shown as capital in the company's balance sheet. c) No account need be taken of differences due to the different classes of shares issued (ordinary shares, preference shares, plural voting shares, non-voting shares, bearer shares, registered shares, etc.), as such differences relate more to the nature of the shareholder's right than to the extent of his ownership of the capital. d) When a loan or other contribution to the company does not, strictly speaking, come as capital under company law but when on the basis of internal law or practice ("thin capitalization", or assimilation of a loan to share capital), the income derived in respect thereof is treated as dividend under Article 10, the value of such loan or contribution is also to be taken as "capital" within the meaning of subparagraph (a). e) In the case of bodies which do not have a capital within the meaning of company law, capital for the purpose of subparagraph (a) is to be taken as meaning the total of all contributions to the body which are taken into account for the purpose of distributing profits. In bilateral negotiations, Contracting States may depart from the criterion of "capital" used in subparagraph (a) of paragraph 2 and use instead the criterion of "voting power". (OECD Commentary on Article 10, page 189) Applying the foregoing commentaries in relation to the application of the provision under Article 10 (2) (a) of the Philippines-Netherlands tax treaty to the instant case, LAIII MEDICAL, being a cooperative whose participation is through membership and not in terms of acquisition of shares as contemplated under the provision of Article 10 (2) (a) of the Philippines-Netherland tax treaty and whose capital is not divided into shares, then the dividend paid by PROFESSIONAL SERVICES to LAIII MEDICAL is, therefore, subject to income tax at the rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 10 of the Philippines-Netherlands tax treaty. 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. aTIAES Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue