ITAD BIR Ruling No. 029-10

August 27, 2010 ITAD BIR RULING NO. 029-10 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 99-08; BIR Ruling Nos. DA-ITAD-085-09; 040-09; and 08-09 Siguion Reyna Montecillo & Ongsiako Law Offices 4th & 6th Floors, Citibank Center 8741 Paseo de Roxas Makati City, 1226 Philippines Attention: Jose Lis C. Leagogo Ma. Corazon U. Del Castillo Authorized Representatives Gentlemen : This refers to your letter dated February 10, 2010 requesting confirmation of your opinion that dividend payments of Swedish Match Philippines, Inc. (SMPI) to Swedish Match Group B.V. (Swedish Match Netherlands) are subject to the 10 percent preferential tax rate under the Philippines-Netherlands Tax Treaty. It is represented that Swedish Match Netherlands is a nonresident foreign corporation organized and existing under the laws of the Netherlands with address at John F. Kennedylaan 3 5555 XC Valkenswaard per Declaration of Residence issued by the inspector of the Tax Administration of Oost-Brabant, the Netherlands; that it is not registered either as a corporation or as a partnership in the Philippines per certification dated February 8, 2010 issued by the Securities and Exchange Commission; that SMPI is a corporation duly organized and existing under and by virtue of Philippine laws, with office address at 104 Technology Ave., Laguna Technopark, Bian, Laguna. It is also represented that Swedish Match Netherlands owns Four Million Twelve Thousand Two Hundred Three (4,012,203) common shares of SMPI with par value of One Hundred Pesos (PhP100.00) per share amounting to Four Hundred One Million Two Hundred Twenty Thousand Three Hundred Pesos (PhP401,220,300.00); that said shares represent 99.99% of the outstanding capital stock of SMPI; that on October 15, 2009, the Board of Directors of SMPI approved a dividend declaration, or approximately US$0.75 per share, October 15, 2009 as declaration date and December 31, 2008 as record date; and that the issue/s or transaction subject of the above 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 taxpayer/s involved. 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. It provides: EaISDC "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%). IHaECA 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 reply, please be informed that Article 10 of the Philippines-Netherlands tax treaty provides as follows: "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 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 that distribution is a resident. AEcIaH xxx xxx xxx" Based on the aforequoted Article 10 insofar as the Philippines is concerned, the 10 percent preferential tax rate on dividends apply 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. 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." 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, SMPI, the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. Swedish Match Netherlands, the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, SMPI is deemed a domestic corporation, while Swedish Match Netherlands is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly, SMPI 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, Swedish Match Netherlands, the recipient of the subject dividends, is a resident of The Netherlands for purposes of the Philippines-Netherlands tax treaty as stated in the Declaration of Residence issued by the inspector of the Tax Administration of Oost-Brabant, the Netherlands. Fourthly, Swedish Match Netherlands is the beneficial owner of the subject dividends. CIaHDc Fifthly, the capital of Swedish Match Netherlands is wholly divided into shares, based on a copy of the Articles of Association of Swedish Match Group B.V. Lastly, Swedish Match Netherlands directly holds 99.9% of the outstanding capital stock of SMPI per Secretary's Certificate dated January 22, 2010 issued by the Corporate Secretary of SMPI, or more than the required stockholdings of 10%. Thus, this Office is of the opinion and so holds that herein subject dividends which are paid by SMPI to Swedish Match Netherlands are 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-99-08 dated 17 November 2008; BIR Ruling No. DA-ITAD 008-09 dated January 27, 2009; BIR Ruling No. DA-ITAD-040-09 dated March 25, 2009; BIR Ruling No. ITAD-085-09 dated September 10, 2009) 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