ITAD BIR Ruling No. 012-11

January 19, 2011 ITAD BIR RULING NO. 012-11 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. DA-ITAD-008-09; BIR Ruling No. DA-ITAD-040-09; BIR Ruling No. DA-ITAD-085-09 Sycip Salazar Hernandez & Gatmaitan Attorneys-at-Law SSHG Law Centre 105 Paseo de Roxas 1266 Makati City Attention: Atty. Hector M. de Leon, Jr. Atty. Hiyasmin H. Lapitan Gentlemen : This refers to your letter dated February 17, 2009, on behalf of JGP CBK POWER B.V. (hereinafter referred to as "JGPC Power" ), requesting for a ruling that the dividends of JGPC Power received from CBK POWER CORPORATION (hereinafter referred to as "CBK") are subject to final withholding tax at the preferential rate of 10 percent pursuant to Article 10 (2) (a) of 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 (hereinafter referred to as the "Philippines-Netherlands tax treaty"). CaEIST It is represented that JGPC Power (previously named IMPSA CBK PROJECTS B.V.) is a foreign corporation organized and existing under the laws of The Netherlands with principal office at Locatellikade 1 Parnassustoren, 1076 AZ Amsterdam, The Netherlands per Declaration of residence issued on July 11, 2007; that it is a resident of The Netherlands with an authorized capital amounting to ninety thousand seven hundred sixty euro (EUR90,760), divided into nine thousand seventy-six (9,076) shares, each share having a nominal value of ten euro (EUR10), as evidenced by its duly notarized Articles of Association, as amended by notarial deed executed on December 12, 2005; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Philippine Securities and Exchange Commission dated March 31, 2009; that CBK, on the other hand, is a wholly-owned subsidiary of JGPC Power duly organized and existing under the laws of the Philippines with office address at 29th Floor, LKG Tower, Ayala Avenue, Makati City; that JGPC Power is the legal and beneficial owner of 78,365 common stock of CBK which comprises 100% of the outstanding capital stock of CBK as evidenced by a certification executed by the corporate secretary of CBK on July 1, 2008. It is further represented, as evidenced by a certification executed by the corporate secretary of CBK on April 2, 2009, that on September 29, 2008, a resolution was unanimously adopted and approved by the Board of Directors of CBK confirming that the declaration of dividends in favor of its stockholders, including the declaration of dividends in favor of JGPC Power as specified in the table below were duly authorized: Date of Dividend Declaration Amount of Dividends Declared in favor of JGP CBK Power B.B. (in PhP) March 7, 2005 17,198,324.00 June 7, 2005 6,424,312.70 September 7, 2005 5,358,996.30 December 7, 2005 1,828,789.00 March 7, 2006 7,837,959.39 June 7, 2006 5,629,249.16 September 7, 2006 5,707,417.06 December 7, 2006 2,225,926.97 March 7, 2007 5,511,688.00 June 7, 2007 2,983,500.00 September 7, 2007 5,929,122.00 December 7, 2007 7,318,619.12 March 7, 2008 2,980,848.48 June 10, 2008 3,998,250.00 Finally, it is asserted that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that dividend income of a nonresident foreign corporation is generally taxable under Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended. It provides as follows: "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 NIRC of 1997 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." In this particular case, the treaty invoked is the Philippines-Netherlands tax treaty which Article 10 thereof provides that: "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. HTIEaS 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. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 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. 6. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of one of the States, carries on business in the other State, of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other State professional services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 7. If a resident of one of the States has a permanent establishment in the other State, this permanent establishment may be subject to an additional tax on the profits remitted by that permanent establishment to its head office in accordance with the law of the last-mentioned State, but the additional tax so charged shall not exceed 10 per cent of the amount of the remitted profits. This provision shall not apply to profits mentioned in Article 8. 8. Where a company which is a resident of one of the States derives profits or income from the other State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State." Based on the aforequoted provision, insofar as the Philippines is concerned, the 10 percent preferential tax rate on dividends applies when the following conditions concur: 1) the payor and recipient of the dividends are separately treated as a "company", 2) the payor of the dividends is a resident of the Philippines, 3) the recipient of the dividends is 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 of the dividends. On the other hand, the 15 percent preferential tax rate will apply upon concurrence of the following: 1) the payor of the dividends is a "company", 2) the payor of the dividends is a resident of the Philippines, 3) the recipient of the dividends is 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". 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." TCAHES 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, CBK, the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. JGPC Power, the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, CBK is deemed a domestic corporation, while JGPC Power is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly, CBK 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. Thirdly, JGPC Power, the recipient of the subject dividends, is a resident of The Netherlands for purposes of the Philippines-Netherlands tax treaty as evidenced by its duly notarized Articles of Association. Fourthly, JGPC Power is the beneficial owner of the subject dividends, based on a Secretary's Certificate executed by CBK on April 2, 2009. Fifthly, the capital of JGPC Power is wholly divided into shares, based on its duly notarized Articles of Association, amended by a notarial deed executed on December 12, 2005. Lastly, JGPC Power directly holds 100 percent of the capital of CBK as evidenced by a Secretary's Certificate executed by CBK on July 1, 2008, or more than the required stockholding of 10 percent. Thus this Office is of the opinion as it hereby holds that the dividends received by JGPC Power from CBK 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. (BIR Ruling No. ITAD-99-08 dated November 17, 2008; BIR Ruling No. DA-ITAD 008-09 dated January 27, 2009; 040-09 dated March 25, 2009; 085-09 dated September 10, 2009) 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, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue