ITAD BIR Ruling No. 026-11

January 26, 2011 ITAD BIR RULING NO. 026-11 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-81-10 Team Energy Corporation Grande Island, Ibabang Polo Quezon Province Attention: Kazunobu Takijima VP-Controller Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on December 15, 2010, requesting confirmation of your opinion that the dividends to be received TOKYO ELECTRIC POWER COMPANY INTERNATIONAL B.V. ("TEPCI") from TEAM ENERGY CORPORATION ("Team Energy") are subject to the preferential tax rate of 10 percent of the gross amount of the dividends 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") . cCSHET It is represented that TEPCI is a corporation organized and existing under the laws of The Netherlands, with authorized capital of two hundred forty million Euro, divided into two hundred forty thousand shares with a par value of one thousand Euro each, as shown in its Articles of Association; that it is a resident of The Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty with principal address at Strawinskylaan 3105 1077 ZX Amsterdam, The Netherlands, per Declaration of Residence issued by the Tax and Customs Administration of The Netherlands dated September 8, 2010; that it is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated June 29, 2010; and that Team Energy, on the other hand, is a corporation organized and existing under the laws of the Philippines with principal address at Grande Island, Ibabang Polo, Quezon Province. It is further represented that TEPCI has shareholdings of 16,534,177, representing 50% total outstanding shares in Team Energy as of December 10, 2010, based on the Secretary's Certificate issued by Team Energy dated December 10, 2010; that on December 10, 2010, the Board of Directors of Team Energy declared a cash dividend amounting to US$56,000,000.00 payable to all the stockholders of record of Team Energy as of December 31, 2010, in US dollars; and that the said dividends are payable on or before December 31, 2010. It is finally represented 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 per Secretary's Certificate issued by Team Energy dated December 10, 2010. 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 income received 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%)." EHACcT 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: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." 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. 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. DHCSTa 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." Based on the aforequoted Article 10 as far 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 must be separately treated as a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be 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, in applying the 15 percent preferential tax rate, less stringent conditions need concurrence, to wit: (1) the payor of the dividends must be a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of The Netherlands, and (4) the recipient of the dividends is the beneficial owner thereof. Thus, the 10 percent preferential tax rate on dividends applies whenever the beneficial owner of the dividends owns at least 10 percent of the capital of the paying company. In all other cases, 15 percent preferential tax rate applies. 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." acTDCI 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 , Team Energy, the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. TEPCI, the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, Team Energy is deemed a domestic corporation, while TEPCI is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly , Team Energy 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 , TEPCI, the recipient of the subject dividends, is a resident of The Netherlands for purposes of the Philippines-Netherlands tax treaty as declared by the tax authority of The Netherlands. Fourthly , TEPCI is the beneficial owner of the subject dividends, based on the Secretary's Certificate dated December 10, 2010. Fifthly , the capital of TEPCI is wholly divided into shares, based on the Articles of Association of TEPCI. Lastly , TEPCI directly holds 50 percent of the total amount of subscribed and paid up shares of Team Energy, per Secretary's Certificate dated December 10, 2010 issued by the Corporate Secretary of Team Energy, or more than the required stockholdings of 10 percent. Such being the case and considering that TEPCI holds more than 10 percent of the capital of Team Energy, this Office is of the opinion and so holds that the dividend payments by Team Energy to TEPCI 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-081-10 dated December 20, 2010) 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