ITAD BIR Ruling No. 028-11

January 28, 2011 ITAD BIR RULING NO. 028-11 Article 10, Philippines-Netherlands Tax Treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. ITAD-46-10; BIR Ruling No. ITAD-37-10; BIR Ruling No. ITAD-29-10; BIR Ruling No. ITAD-21-10; BIR Ruling No. ITAD-075-10 KPI Elevators, Inc. 2nd Floor, King's Court 2 Bldg. 2129 Chino Roces Avenue Makati City Attention: Hannu K. Myrberg Country Manager Gentlemen : This refers to your application for tax treaty relief dated December 8, 2010, on behalf of Kone Holland B.V. (hereinafter referred to as "Kone" ), requesting confirmation that dividend payments made by KPI Elevators, Inc. (hereinafter referred to as "KPI") to Kone are subject to 10 percent preferential tax rate pursuant to 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 "Philippines-Netherlands tax treaty" ). It is represented that Kone , with address at Postbus 24005 2490 AA Den Haag, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issued by the Inspector of the Tax and Customs Administration of the Netherlands on November 19, 2010; that Kone is a private company duly organized and existing under the laws of the Netherlands, with authorized capital of three hundred sixty-three million two hundred thousand Euro (EUR363,200,000), divided into eight hundred thousand (800,000) shares of four hundred and fifty-four Euro (EUR454) each per the Amendment of the Articles of Association of Kone ; that Kone is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on November 23, 2010; and that, on the other hand, KPI is a domestic corporation located at the 2nd F. King's Court 2 Bldg., 2129 Chino Roces Avenue, Makati. It is further represented that at the meeting held on November 4, 2010, the Board of Directors of KPI unanimously approved the declaration of cash dividends in the amount of Thirty Million Pesos (P30,000,000.00), to be taken out of the unrestricted retained earnings of KPI as of December 31, 2009, and payable on December 20, 2010 based on the Certificate issued by the Assistant Corporate Secretary of KPI on November 11, 2010; that as of the date of declaration of dividends and as of December 20, 2010, 323,175 common shares of KPI are registered under the name of Kone , which represent 99.9% of the total outstanding capital stock of KPI, with a total par value of Thirty-Two Million Five Hundred Seventeen Thousand Five Hundred Pesos (P32,317,500.00); and that these shares were acquired by Kone on the following dates: cAHDES Date Number of shares July 21, 1995 126,880 common shares May 28, 1998 45 common shares July 29, 1998 196,250 common shares It is finally represented, based on the Sworn Statement by the same Corporate Secretary on November 9, 2010, that the transaction subject of the 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 judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (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. 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%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides that any income may be exempt to the extent required by any treaty obligation binding upon the Philippine Government, thus: "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" With respect to a treaty, what you invoke for this purpose is the Philippines-Netherlands tax treaty. Its Article 10 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: IAETSC 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" Based on the aforequoted 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: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as Kone is a private company in the Netherlands, the capital of which is wholly divided into shares and since Kone holds directly 99.9% percent of the capital of KPI (which is actually more than the required minimum of shareholding of 10 percent), such dividends to be paid by KPI to Kone 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. [BIR Ruling No. ITAD-46-10 dated October 5, 2010; BIR Ruling No. ITAD-37-10 dated September 16, 2010; BIR Ruling No. ITAD-29-10 dated August 27, 2010; BIR Ruling No. ITAD-21-10 dated August 20, 2010; BIR Ruling No. ITAD-99-08 dated November 17, 2008] 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. HTSAEa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue