ITAD BIR Ruling No. 015-14

February 5, 2014 ITAD BIR RULING NO. 015-14 Article 10, Philippines-Netherlands tax treaty Manabat Delgado Amper & Co. 5th Floor Salamin Building 197 Salcedo Street, Legaspi Village Makati City 1229 Attention: Atty. Walter L. Abela, Jr. Emmanuel E. V. Cruz Representatives Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on October 6, 2011, on behalf of Atlas Copco Aktiebolag ("Atlas-Sweden") , requesting that the dividend paid to Atlas-Sweden by Atlas Copco (Philippines), Inc. ("Atlas-Phil") is subject to 10 percent final withholding tax rate under Article 10 of the amended Convention between the Republic of the Philippines and the Kingdom of Sweden for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Sweden tax treaty, as amended") . DaHSIT It is represented that Atlas-Sweden , with principal address at 105 23 Stockholm, Sweden, is a corporation organized and existing under the laws of Sweden, and is a resident thereof within the meaning of the Philippines-Sweden tax treaty per the Certificate issued by the Swedish Tax Agency dated August 20, 2013; that it is not registered either as a corporation or as a partnership in the Philippines per certification of Non-Registration of Company issued by the Securities and Exchange Commission dated September 30, 2011; and that, on the other hand, Atlas-Phil is a corporation organized and existing under the laws of the Philippines, with principal address at North Main Avenue, Lot 12 Block 2 Phase 2, Laguna Technopark, Bian, Laguna 4024. It is further represented that at the regular meeting of the Board of Directors of Atlas-Phil on July 21, 2011, the Board of Directors declared cash dividends out of its unrestricted retained earnings in the total amount of One Hundred Fifty Seven Million Pesos (PHP157,000,000) payable to all stockholders of record as of December 10, 2010; that Atlas-Sweden is the owner of 121,995 common shares with a total value of Php12,199,500.00, representing 100% of Atlas-Phil 's subscribed and paid-up capital; and that, based on the two (2) certifications issued by The Hongkong and Shanghai Banking Corporation Limited (HSBC), Atlas-Phil remitted funds to Atlas-Sweden by means of telegraphic transfer on the following dates: November 28, 2011, December 28, 2011, August 30, 2012, September 27, 2012, and October 30, 2012, respectively. It is finally represented, per Sworn Statement dated September 20, 2011 issued by Atlas-Phil , that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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 interest, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments, or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." aDcETC However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 32. Gross Income. (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." In relation to a treaty, Article 10 of the Philippines-Sweden tax treaty, as amended, reads: "Article 10 Dividends 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 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 the law of that State, but if the recipient is the beneficial owner of the dividends that tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnership) which holds directly at least 25 percent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. 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 3. 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 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." CHDAaS Based on the aforequoted provisions, the 10 percent preferential tax rate on dividends shall apply whenever the recipient company, who is the beneficial owner of the dividends, holds directly at least 25 percent of the capital of the paying company. In all other cases, the 15 percent preferential tax rate shall apply. Such being the case and considering that Atlas-Sweden is a company which holds 121,995 common shares which represents 100% of Atlas-Phil 's subscribed and paid-up capital, such dividends paid by Atlas-Phil to Atlas-Sweden are subject to 10 percent preferential final withholding tax rate pursuant to Article 10 (2) (a) of the Philippines-Sweden tax treaty, as amended. This ruling is issued on the basis of the foregoing 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