ITAD BIR Ruling No. 043-15

March 25, 2015 ITAD BIR RULING NO. 043-15 Article 10 (Dividends), Philippines-Netherlands tax treaty Quisumbing Torres 12F Net One Centre 26th St. cor. 3rd Avenue Crescent Park West Bonifacio Global City Taguig City Attention: Atty. Maria Ana Camila C. Jacinto-Lagustan Authorized Representative Gentlemen: This refers to your tax treaty application ("TTRA") filed on December 19, 2013, requesting confirmation that dividends paid by Assembleon Philippines, Inc. ("Assembleon") to Koninklijke Philips N.V. ("Koninklijke") is subject to income tax at the rate of 10% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of the Netherlands with respect to Taxes on Income ("Philippines-Netherlands" tax treaty). It is represented that Koninklijke is a non-resident foreign corporation organized and existing under the laws of the Netherlands, the capital of which is divided into shares as evidenced by Article 3 on Share Capital and Shares of its Articles of Incorporation; that it is a resident of the Netherlands within the meaning of Article 4 of the Convention for the avoidance of double taxation between the Philippines and the Netherlands, with principal address at High Tech Campus 5, 5656 AE Eindhoven, The Netherlands; that it is not registered as a corporation or a partnership in the Philippines per certification of non-registration issued by the Securities and Exchange Commission on January 9, 2014; and that on the other hand, Assembleon, is a domestic corporation duly organized and existing under the laws of the Philippines with principal address at 10F Sunlife Centre, 5th Avenue, Rizal Avenue, Bonifacio Global, Taguig City. It is also represented that Koninklijke is the registered owner of One Hundred Thousand One Hundred Eighty-Five (100,185) common shares as of December 20, 2013 constituting 100% of the issued and outstanding shares of Assembleon; that on December 17, 2013 the board of directors of Assembleon has declared cash dividends out of unrestricted retained earnings in the amount of Fourteen Million Sixty Nine Thousand Five Hundred Ninety-Two Pesos (14,069,592.00) as of December 31, 2012 in favor of all stockholders of record of the Corporation as of December 31, 2012 which shall be paid not earlier than December 20, 2013; and that on December 23, 2013 Assembleon paid Koninklijke the amount of USD Two Hundred Eighty-Nine Thousand Four Hundred Ninety-Seven and 17/100 (USD289,497.17) per copy of Philips Intercompany Dividend Notification. It is further represented, per sworn certification dated May 9, 2014, that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. 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 Koninklijke 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 Non-resident 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 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-Netherlands tax treaty. Paragraphs 1 & 2 of Article 10 thereof provide: "Article 10 Dividend s 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" Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which owns directly at least ten percent (10%) of the capital of the company paying the dividends; and (b) 15 percent in all other cases. Accordingly, considering that Koninklijke, a registered company in the Netherlands with capital divided into shares, holds 100,185 common shares, constituting 100% of the stocks of Assembleon which is more than 10% of the issued and outstanding stocks of the latter, this Office is of the opinion and so holds that the dividend paid by Assembleon to Koninklijke is subject to income tax at the rate of ten percent (10%) of the gross amount of dividend, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. 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