ITAD BIR Ruling No. 035-12

February 8, 2012 ITAD BIR RULING NO. 035-12 Article 10 (Dividends) Philippines-Germany tax treaty; BIR Ruling No. ITAD 63-10 Castillo Laman Tan Pantaleon & San Jose Law Office 122 Valero Street Salcedo Village Makati City Attention: Atty. Maria Victoria D. Sarmiento Legal Counsel Gentlemen : This refers to your tax treaty relief application dated August 26, 2011 on behalf of your client, Boehringer Ingelheim International GMBH ("Boehringer Germany") requesting confirmation that dividends received by Boehringer Germany from Boehringer Ingelheim Philippines, Inc. ("Boehringer Phil.") are subject to the preferential rate of 10 percent pursuant to 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. ("Philippines-Germany tax treaty"). It is represented that Boehringer Germany is a corporation organized and existing under the laws of Germany and is a resident thereof with principal business address at Binger Strasse 173, 55216 Ingleheim am Rheim, Germany, based on the Certificate of Residence issued by the German Tax Authorities on July 22, 2011; that Boehringer Germany is not registered as a corporation or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission on June 17, 2011; and that on the other hand, Boehringer Phil. is a domestic corporation situated at the 23rd Floor, Citibank Tower, 874 Paseo de Roxas, Salcedo Village, Makati City. It is further represented, based on the Certificate issued by the Corporate Secretary of Boehringer Phil. on August 22, 2011, the Board of Directors of Boehringer Phil. through a special meeting held on June 30, 2011, declared cash dividends in favor of the stockholders of record as of December 31, 2010 in the amount of PhP404,000,000.00, out of its unrestricted retained earnings as of December 31, 2010, payable on or before August 31, 2011; that the capital structure of Boehringer Phil. is as follows: (1) Authorized capital stock of PhP300,000,000.00 divided into 3,000,000 shares with a par value of PhP100 each; (2) Subscribed and paid-up capital of PhP240,000,000.00; that as of June 30, 2011, Boehringer Germany holds 2,400,000 shares, inclusive of five shares held in trust by its Directors, in Boehringer Phil., or 100% percentage of ownership in Boehringer Phil. CAScIH It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certificate of No Pending Case issued by the Corporate Secretary of Boehringer Phil. on July 7, 2011. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, dividends paid to Boehringer Germany are subject to income tax at the rate of 30 percent, thus: "SEC. 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 interests, 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) and (d) above: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "SEC. 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." For this purpose, you invoke the Philippines-Germany tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: IASCTD "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; b) in all other cases, 15 per cent of the gross amount of dividends." Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of Germany may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient of the dividends is a company which owns directly at least 25 percent of the capital of the company paying the dividends; and (b) 15 percent in all other cases. Accordingly, considering that Boehringer Germany holds directly at least 25 percent of the capital of Boehringer Phil. (in fact, 100 percent),such dividends paid by Boehringer Phil. to Boehringer Germany are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Germany tax treaty. (BIR Ruling No. ITAD 63-10 dated November 19, 2010) 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