ITAD BIR Ruling No. 038-16

April 1, 2016 ITAD BIR RULING NO. 038-16 Article 10, Philippines-Netherlands tax treaty Jardine Distribution, Inc. 2F Jardine Building, JM Compound 2901 Faraday St., corner Osmea Highway Makati City Attention: Azenith B. Tingchuy Associate Legal & HR Manager Gentlemen : This refers to your tax treaty relief application filed on December 16, 2014, requesting confirmation that dividends paid to Jardine Matheson Europe B.V. ("Jardine-Netherlands") by Jardine Distribution, Inc. ("Jardine-Philippines") 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") . It is represented that Jardine-Netherlands is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per Declaration of Residence issued by the Tax and Customs Administration of the Netherlands dated April 4, 2014; that it is a corporation organized and existing under the laws of the Netherlands with an issued and paid up share capital amounts to forty-five thousand seven hundred forty-eight United States Dollars (USD45,748.--), divided into forty-five thousand seven hundred forty-eight (45,748) Shares, each having a nominal value of one United States Dollar (USD1.--); 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 January 13, 2014; and that, on the other hand, Jardine-Philippines is a corporation organized and existing under the laws of the Philippines. It is further represented that at the Special Meeting of the Board of Directors of Jardine-Philippines held on December 11, 2014, the Board of Directors of Jardine-Philippines declared cash dividend amounting to One Hundred Seventy-Two Million Pesos (Php172,000,000.00) to stockholders of record as of November 30, 2014, based from the unrestricted retained earnings based on the unaudited accounts as of November 30, 2014 on the 535,000 presently subscribed and outstanding shares of common stock of Jardine-Philippines , payable on December 17, 2014; that as of November 30, 2014, Jardine-Philippines is a wholly-owned subsidiary of Jardine-Netherlands and that the latter holds 535,000 common shares with a par value of Php100.00 per share which represents 100 percent ownership of Jardine-Philippines ; and that the said shares was acquired by Jardine-Netherlands on December 29, 2005 through sale from Jardine Davies, Inc. aDSIHc It is finally represented, per the Sworn Statement issued on December 16, 2014 issued by Jardine-Philippines , 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 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. 6. 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. Such being the case and considering that Jardine-Netherlands is a company resident in the Netherlands with no fixed place of business in the Philippines, the capital of which is wholly divided into shares, which holds 100 percent ownership of Jardine-Philippines , this Office is of the opinion and so holds that dividends paid to Jardine-Netherlands by Jardine-Philippines are subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. ETHIDa 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