ITAD BIR Ruling No. 020-11

January 21, 2011 ITAD BIR RULING NO. 020-11 Article 10, Philippines-Germany tax treaty; BIR Ruling No. 559-88; BIR Ruling No. ITAD-171-02; BIR Ruling No. ITAD-144-03; BIR Ruling No. ITAD-181-03; BIR Ruling No. ITAD-012-05 Nonato & Nonato Law Office Rm. 406 Tulips Center, A.S. Fortuna St. Bakilid, Mandaue City, Cebu Attention: Atty. Rolando P. Nonato Legal Counsel Gentlemen : This refers to your letter dated August 14, 2009, on behalf of Der Lederspezialist Mariane Christ GMBH (hereinafter referred to as "Der Lederspezialist" ), requesting confirmation that the cash dividends received from Philippines Light-Leather, Inc. (hereinafter referred to as "PLLI") are subject to a 10% preferential tax rate as provided under Article 10 (2) (a) of the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital (hereinafter referred to as the "Philippines-Germany tax treaty" ). HcSDIE It is represented that Der Lederspezialist is a nonresident foreign corporation organized and existing under the laws of Germany with principal office address at Ferdeand-Sauerbruch-Str. 19 56073 Koblenz, Germany per Certification of Residence from the German Tax Administration dated October 8, 2009; that Der Lederspezialist is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on August 26, 2009; that PLLI is a domestic corporation duly organized and existing under the laws of the Philippines with principal office address at 211 PIPC Building 2, 5th Street, MEZ I, Lapu Lapu City, Cebu; that PLLI is a Philippine Economic Zone Authority (PEZA)-registered corporation under Certificate of Registration No. 03-021. It is further represented that Der Lederspezialist owns 190,595 shares which is equivalent to 99.9% of the total issued and acquired shares of PLLI, acquired as follows: Date of Acquisition No. of Shares February 4, 2003 9,995 August 22, 2008 45,000 March 23, 2009 135,600 Total No. of Shares 190,595 ====== That on March 23, 2009 during its Special Meeting, the Board of Directors of PLLI resolved to declare an amount of P22,000,000.00 as cash dividends and P13,560,000.00 as stock dividends out of the unrestricted retained earnings of P36,095,330.00 of PLLI in favor of the stockholders of record as of January 31, 2009; that the said cash dividends was paid and credited to Der Lederspezialist on April 30, 2009 per the Secretary's Certificate issued by PLLI dated January 19, 2010; and that the transaction subject of the herein 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 taxpayers involved. aAcHCT In reply, please be informed that dividend payments to a nonresident foreign corporation are, in general, taxable under Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended. It provides: "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, rents, royalties . . .: 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 of 1997, as amended 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" In this particular case, the treaty being invoked is the Philippines-Germany tax treaty, specifically its Article 10, which provides as follows: "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 be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; ASDTEa (b) in all other cases, 15 per cent of the gross amount of dividends. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident, and income derived by a sleeping partner from his participation as such and distributions on certificates of an investment-trust." xxx xxx xxx Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Germany at a rate not exceeding ten percent (10%) if the last-mentioned company holds directly at least twenty-five percent (25%) of the capital of the company paying the dividends. Accordingly, since Der Lederspezialist holds directly 99.9% of the shares of PLLI, your opinion that the dividends to be paid by PLLI to Der Lederspezialist are subject to the 10% preferential tax rate pursuant to the RP-Germany tax treaty, is hereby confirmed. (BIR Ruling No. 559-88 dated November 24, 1988; DA-ITAD Ruling No. 171-02 dated October 2, 2002; DA-ITAD Ruling No. 144-03 dated September 25, 2003; DA-ITAD Ruling No. 181-03 dated November 25, 2003; DA-ITAD Ruling No. 012-05 dated February 16, 2005) 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