ITAD BIR Ruling No. 044-11

February 10, 2011 ITAD BIR RULING NO. 044-11 Article 10 (2) (a), Philippines-Netherlands tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. ITAD-99-08; BIR Ruling No. DA-ITAD-008-09; BIR Ruling No. DA-ITAD-040-09; BIR Ruling No. DA-ITAD-085-09 SyCip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City, Philippines Attention: W.U. Villanueva Principal, Tax Services Gentlemen : This refers to your letter dated November 23, 2009, on behalf of your client, Carrier HVACR Investments B.V. (Carrier B.V.) , applying for tax treaty relief from double taxation, requesting for confirmation that the dividend payments by Carrier Air Conditioning Philippines, Inc. (CACPI) are subject to a preferential tax rate of 10 percent pursuant to the Philippines-Netherlands tax treaty. It is represented that Carrier B.V. , with address at Strawinskylaan 3105, 1077 ZX Amsterdam, the Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty, per Certification dated November 5, 2009 issued by the Dutch Tax Authority; that its authorized share capital amounts to Two Hundred Thousand Dutch Guilders (NLG200,000.00), divided into Two Thousand (2,000) shares with par value of One Hundred Dutch Guilders (NLG100.00); that it is not registered either as a corporation or as a partnership in the Philippines per certification dated November 23, 2009 issued by the Securities and Exchange Commission; that CACPI is a corporation duly organized and existing under and by virtue of Philippine laws, with principal place of business located at Km. 20 East Service Road, South Superhighway, Alabang, Muntinlupa, Philippines. It is further represented that, as evidenced by a Certification dated November 23, 2009 issued by the Corporate Secretary of CACPI, Carrier B.V. has Two Hundred Seventy-Nine Thousand Nine Hundred Ninety-Five (279,995) shares in the capital stock of CACPI, with a par value of One Hundred Pesos (PhP100.00) per share, amounting to Twenty-Seven Million Nine Hundred Ninety-Nine Thousand Five Hundred Pesos (PhP27,999,500.00), representing 99.99% of the outstanding and voting shares of CACPI; that on November 23, 2009, the Board of Directors of CACPI declared cash dividend in the total amount of Eight Hundred Seventy-One Million Eighty-Four Thousand Four Hundred Eighteen Pesos (PhP871,084,418.00) out of the unrestricted retained earnings of CACPI as of October 31, 2009, Six Hundred Fifty-Four Million Pesos (PhP654,000,000.00) payable on or before November 30, 2009, and Two Hundred Seventeen Million Eighty-Four Thousand Four Hundred Eighteen Pesos (PhP217,084,418.00) payable on or before December 31, 2009; and that the issue/s or transaction subject of the above request for ruling are 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, per Sworn Certification issued by the Chairman of CACPI dated November 23, 2009. DAaIEc 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: "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: "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 this particular case, the treaty involved is the Philippines-Netherlands tax treaty which, in its Article 10, provides as follows, viz. : "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. xxx xxx xxx" Based on the aforequoted Article 10 insofar as the Philippines is concerned, the 10 percent preferential tax rate on dividends applies 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. aHECST 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. xxx xxx xxx" 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, CACPI, the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. Carrier B.V. , the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, CACPI is deemed a domestic corporation, while Carrier B.V. is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly, CACPI 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, Carrier B.V. , the recipient of the subject dividends, is a resident of the Netherlands for purposes of the Philippines-Netherlands tax treaty as declared by the tax authority of the Netherlands. Fourthly, Carrier B.V. is the beneficial owner of the subject dividends, based on the Secretary's Certificate dated November 23, 2009. Fifthly, the capital of Carrier B.V. is wholly divided into shares, based on a copy of the Articles of Incorporation of Carrier B.V. Lastly, Carrier B.V. directly holds 99.99% of the capital of CACPI, per Secretary's Certificate dated November 23, 2009 issued by the Corporate Secretary of CACPI, or more than the required stockholdings of 10 percent. Thus, this Office is of the opinion as it hereby holds that the dividends paid by CACPI to Carrier B.V. shall be 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 November 17, 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. DA-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. AHDaET Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue