ITAD BIR Ruling No. 024-17

July 13, 2017 ITAD BIR RULING NO. 024-17 Article 10, Philippines-Netherlands tax treaty Philippine Telecommunications Investment Company 6/f Ramon Cojuangco Building Makati Avenue 1200 Makati City Attention: AAA Gentlemen : This refers to your tax treaty relief application filed on September 22, 2014, on behalf of LAROUGE B.V. (" Larouge "), requesting confirmation that dividends paid by Philippine Telecommunications Investment Company (" PTIC ") to LAROUGE are subject to the preferential tax rate of 10 percent pursuant to Article 10 of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Netherlands tax treaty "). SDHTEC It is represented that Larouge is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Certificate of Residence issued by the Tax and Customs Administration of the Netherlands dated March 5, 2014; that it is a corporation organized and existing under the laws of the Netherlands with an authorised capital amounts to ____________________ euros (________) divided into two hundred (200) shares with a nominal value of ____________________ euro (________) each; 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 March 12, 2014; and that, on the other hand, PTIC is a corporation organized and existing under the laws of the Philippines. It is further represented that during the meeting of the Board of Directors of PTIC held on August 6, 2014, the Board of Directors of PTIC declared cash dividends amounting to Php_______________ out of its unrestricted retained earnings payable to stockholders of record as of August 29, 2014, payable on September 29, 2014; that as of August 19, 2014, Larouge owns 96,619 common shares with a total par value of _______________ which represents 40 percent of the total and outstanding shares of stocks of PTIC ; and that the said shares was acquired by PTIC by purchase. It is finally represented, per the Sworn Statement dated September 15, 2014 issued by PTIC , 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 which 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 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%)." 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 obligation binding upon the Government of the Philippines . xxx xxx xxx" Thus, the provisions of Article 10 of the Philippines-Netherlands tax treaty, which you invoke, may apply to the instant case. It provides: "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 3. 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. AScHCD 4. 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." Based on the above-cited provision, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed 10 percent of the gross amount of the dividends if the recipient of the dividends is a company, the capital of which is divided into shares, and owns at least 10 percent of the capital of the paying company. In all other cases, the 15 percent preferential tax rate applies. Accordingly, inasmuch as Larouge is a company in the Netherlands the capital of which is wholly divided into shares and that it holds directly 40 percent of the capital of PTIC (which is actually more than the required minimum of shareholding of 10 percent), such dividends to be paid by PTIC to Larouge are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) 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. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue