ITAD BIR Ruling No. 043-11

February 9, 2011 ITAD BIR RULING NO. 043-11 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 Tam-Yap & Associates Attorneys-at-Law Unit B, 15th Floor, ACT Tower 135 H.V. de la Costa Street Salcedo Village Makati City Attention: Teresa R. Tam-Yap Maria Graceila B. Suratos Gentlemen : This refers to your tax treaty relief application dated January 8, 2010, on behalf of JGP CBK Power B.V. (hereinafter referred to as "JGP"), requesting confirmation that the dividend payments made by CBK Power Corporation (hereinafter referred to as "CBK") to JGP 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 the "Philippines-Netherlands tax treaty" ). It is represented that JGP, with address at Locatellikade 1, 1076 AZ Amsterdam, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty based on the Declaration of Residence issued by the Inspector of the Tax and Customs Administration of the Netherlands dated November 12, 2010; that based on its Articles of Association, JGP is company incorporated under the laws of the Netherlands with authorized capital of ninety thousand seven hundred sixty euro (90,700.00) divided into nine thousand seventy-six (9,076) shares with a par value of ten euro (10) each; that JGP 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, CBK is a domestic corporation duly organized and existing under Philippine laws, located at the Penthouse 2nd Deck, Salamin Bldg., 197 Salcedo Village, Makati City. It is further represented, as shown in the Secretary's Certificate issued by CBK dated December 20, 2010, that as per BOD Resolution No. 2010-04 dated December 9, 2010, the Board of Directors of CBK has unanimously approved the declaration of cash dividends in the amount of US$66,348.14 in favor of all of CBK's shareholders of record as of December 31, 2010, which shall be payable on or before January 31, 2011; that as of December 31, 2010, JGP owns 78,365 thereof representing 99% ownership of CBK's total shares and that JGP acquired the said shares by subscription. It is finally represented, based on the Sworn Statement by the same Corporate Secretary on December 13, 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. EDSAac 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: 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. DaTHAc 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. 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 JGP is a private company in the Netherlands the capital of which is wholly divided into shares, and since JGP holds directly 99 percent of the capital of CBK (which is actually more than the required minimum shareholding of 10 percent), such dividends to be paid by CBK to JGP are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to 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. caADSE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue